ECO550 Assignment 2: Operations Decision Using the regression results and the other computations from Assignment 1, determine the market structure in which the low-calorie frozen, microwavable food company operates. Use the Internet to research two (2) of the leading competitors in the low-calorie frozen, microwavable food industry, and take note of their pricing strategies, profitability, and their relationships within the industry (worldwide). Write a six to eight (6-8) page paper in which you: 1. Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting QD equal to QS. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price. 2. Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment. 3. Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both the short-run and the long-run. TC = 160,000,000 + 100Q + 0.0063212Q2 VC = 100Q + 0.0063212Q2 MC= 100 + 0.0126424Q 4. Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. (Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations.) 5. Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion. (Hints:  In Assignment 1, you determined your firm’s market demand equation. Now you need to find the inverse demand equation. Having found that, find the Total Revenue function for your firm (TR is P x Q). From your firm’s Total Revenue function, then find your Marginal Revenue (MR) function.  Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower.) 6. Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions. (Hints:  Calculate profit in the short run by using the price and output levels you generated in part 5. Optional: You may want to compare this to what profit would have been in Assignment 1 using the cost function provided here.  Calculate profit in the long run by using the output level you generated in part 5 and cost data in part 3 and assuming that the selling environment will likely be very competitive. Determine why this would be a valid assumption.) 7. Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations. 8. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource. Your assignment must follow these formatting requirements:  Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.  Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length. The specific course learning outcomes associated with this assignment are:  Analyze short-run and long-run production and cost functions.  Apply macroeconomic concepts to changes in global and national economies and how they affect economic growth, inflation, interest rates, and wage rates.  Evaluate the profit-maximizing price and output level for given operating costs for monopolies and firms in competitive industries.  Use technology and information resources to research issues in managerial economics and globalization.  Write clearly and concisely about managerial economics and globalization using proper writing mechanics. Click here to view the grading rubric. RUNNING HEAD: Demand Estimation. Week3: Assignment1: Demand Estimation Student’s name: xxxxxxxxxx Instructor’s name: Dr. xxxxxxx School’s name: xxxxxxxxx Course’s name: Eco550 (Managerial Economics and Globalization) Date: 10/20/2016 RUNNING HEAD: Demand Estimation. 1. Compute elasticities of each variable. Quantity demanded= -5200 – 42P+ 20PX +5.2I +0.20A +0.25M Where: p = PX= 500 A= $10,000 600 M= 5,000 I (SAMSA) = $5,500 Solution: QD= -5200 – 42(500) +20 (600) + 5.2 ($5,500) + 0.2 ($10,000) + 0.25 (5000) = -5200 – 21,000 +12,000 + 28,600 + 2000 + 1250 = 17,650. Outcome of the regression equation: = -42. Price elasticity (EP) = P/Q × (-42) = 500/ 17,650 × (-42) = - 1.18980 (Round off) = -1.19. Cross price elasticity. RUNNING HEAD: Demand Estimation. Ec = 600/ 17650 × 20 = 0.68. Income elasticity. EI = 5,500/17,650 × 5.2 = 1.62 Advertisement elasticity: EA= 10,000/ 17,650 ×0.2 = 0.11 Supply (microwave) elasticity: EM = 5000/17650 × 0.25 = 0.07. 2. Implication of each computed elasticity: In terms of short-term and long-term strategies. The price elasticity, (-1.19), insinuates that the product is price elastic but on a lower degree. This score highly implies that the demand of the commodity is greatly influenced by price change (Tuck, C. Clifford 2004). A follow up on this computation would mean that that the demand of the product would experience a decrease following price increase. Reduction in the price of the commodity on the other hand increases demand of the quantity. The cross process elasticity, 0.68, implies that the price of the microwave is fairly inelastic on the competitor’s prices. In a fairly inelastic demand, change in price in the home company does not accept the change in demand. An increase in price of a competing firm would however increase the demand of the product. The income elasticity, 1.62, depicts price elasticity. Price elasticity is drawn from the reasoning that the figure, 1.62, is more than one. One percent rise in the average income prompts RUNNING HEAD: Demand Estimation. an increase in the demand structure. The company, in the latter, may engage in the increase of pricing following the increase of the average area income. The advertisement elasticity outcome, 0.11, indicates price inelasticity. An increase of the advertisement’s expenses by one percent shoots its demand structure by 0.11%. In the short-run, the computation from the advertisement elasticity triggers an inelastic relationship with the demand movement of the microwave. This inelasticity suggests that the company, to improve its sales, should engage more in the advertisement advances. An increase in the price of the microwave would reduce the quantity demanded. The company should instead refrain from such strategies. The microwave elasticity computed as 0.07 implies; a one percent rise in the quantity (the number) of the microwaves triggers 0.07% rise of the product demand structure. These facts depict that the demand of the microwave is relatively inelastic. Pricing in this case does not affect the commodity’s demand. 3. Should the company increase or cut its prices in attempt of increasing market share? The firm is endowed with a great chance in gaining a large market share not only through price reduction of its commodity but also focusing on the preference of the consumers. From the computation, the price elasticity of the commodity exceeds one. A reduction is price in this case therefore increases the quantity demanded (Timothy 2014). The company would experience an increase in the market share. Price increase on the other hand builds negative forces that may sabotage the development of the firm in the business market. 4. Demand and supply graphical representations. RUNNING HEAD: Demand Estimation. Demand and Supply equations: QD= -5200 – 42P+20 (600) + 5.2 ($5,500) + 0.2 ($10,000) + 0.25 (5000) QD= 38,650 – 42P: QS = -7909.89 +79.1 P When P= 100 = Q= 34,450 When p= 100 QS= 0.11 P= 200 Q= 30,250 p=200 QS= 7,910.11 P= 300 Q= 26,050 P= 300 QS =15,820.11 P= 400 Q= 21,850 P= 400 P= 500 Q= 17,650 P= 500 QS= 31, 640.11 P= 600 P= 600 QS= 39,550.11 Q= 13, 450 QS= 23,730.11 Plotted Demand and Supply Curve: price 600 D S 500 400 300 200 100 S 0 D 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 RUNNING HEAD: Demand Estimation. Demand and Supply (QD, QS) C. Equilibrium both quantity and price. Solution: Quantity demanded = quantity supplied 38,650 – 42P= -7,909.89 + 79.1P 38,650 + 7909.89 = 79.1P + 42P P= 384.47 Q= 22,502.26 The equilibrium price and quantity on the diagram (with a colored line) is situated at the point where the supply and demand curve meets. The equilibrium quantity is viewed 22,503.26 Units while the price rates 84.47 Units. One of the most significant factors affecting the demand of the commodity is change in area income. Rise in income prompts a coinciding demand increase (Voon 2013). Decrease in income on the other hand decreases the quantity demanded. Decrease in the substitute’s goods prices would switch the consumers ‘preferences. Change in consumer taste and preference would also cause a shift in demand. Positive preference in this case would increase the demand. Negative preference on the other hand reduces the demand. Competitor pricing strategies would also alter the demand schedule of the product (Voon 2013). Other factors include change in the technological advancement, availability of labor production and of raw materials. RUNNING HEAD: Demand Estimation. 5. Supply and demand shifts. The demand curve position would shift to the right or left triggered by an alteration in the underlying determinant of demand. A shift to the right can be caused by an increase in consumer income. Income increase, a known fact, prompts an increase in the quantity purchased by a consumer. Increase in the price of the substitute goods is another essential factor that would trigger a demand shift (Timothy 2014). An increase in the consumer’s taste and preferences is another factor that would cause a shift in demand to the right. Other factors include fall in the price of complement, future expectation of price increase in the commodity and favorable government interventions. Demand shifts to the left triggered by a fall in the consumer income, a reduction in the substitutes’ prices, decrease in the consumer taste and preference, future expectation of reduction in prices and negative government influences. The position of the supply curve would shift to the left or right following the change in the underlying supply determinants. A decrease in the production costs, improvement of technology, easy availability of raw materials, tax reduction and increase in the government subsidies would trigger a shift in supply to the right (Mark 2013). On the other hand, an increase in the production costs, tax increase, raw materials unavailability, deprived technology and unfavorable government subsides prompts a shift in supply curve to the left. RUNNING HEAD: Demand Estimation. References Tuck, C.C (2004) Price elasticity Essential Economics; 2004. Voon J. &Geoff W. (2013) Demand and Supply Columbia Electronic Encyclopedia. 6th Edition; Feb 2013.Feb 2013. Katz & Lawrence F 1996 Shift in Labor and demand supply New England Economic Review; Review; May/Jun96 Skousen, M. (2013). “Economic Logic”. Fourth Edition. Regnery. Taylor T (2014) Principles of Microeconomics OpenStax College.
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