Due to changes in the low calorie, frozen, microwavable industry’s market structure, the firm-specific demand equation for our hypothetical company has changed and is now:
QD = 350,000 -100 P
This function generates the following Marginal Revenue Function (MR):
MR = 3500-0.02Q
Write a six to eight (6-8) page paper in which you:
1. Outline a plan that will allow you to identify the market structure in which your company now operates. Comment on the relevant elasticity results from Assignment 1 and your research into two (2) of leading competitors in this industry, taking note of their pricing strategies, profitability, and their relationships within the industry (worldwide).
Note: In Assignment 1, the assumption was that the market structure was perfectly competitive and therefore the equilibrium price would be determined by setting demand equal to supply, or QD = QS. Changes in the market now suggest it is imperfectly competitive and that your firm has substantial market power to set its own “optimal” price.
2. Given that the market structure has changed from the original scenario in Assignment 1, determine at least 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 you may use this information to make production decisions in the short-run and the long-run.
- TC = 160,000,000 + 100Q + 0.00632Q2
- VC = 100Q + 0.00632Q2
- MC= 100 + 0.0126Q
- Hints: What is the equation for average total costs? How is this useful?
- What is the output level and dollar value associated with minimum average total cost and minimum average variable costs?
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 a pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.
- (Hint: Use the profit maximization rule MR = MC to determine your optimal price and optimal output level. You may also want to compare these values with those you generated in Assignment 1 to determine whether your price would be higher or lower.
6. Outline a plan, or use your results above, to evaluate the company’s financial performance. Consider all the key drivers of performance, such as total revenue, total cost, total profit, etc. Assuming the company is currently operating at its optimal scale (min. ATC = min. LRATC), what is the short run and long run strategy if current economic profits are positive … or negative?
- Hint: To calculate profit in the short run, use the cost, price, and output levels you generated in part 5.
- Hint: Profit in the long run will be driven to zero if no significant barriers to entry or exit exist.
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. References: Use at least five (5) quality academic resources in this assignment.
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