ECON 550 PART 2
Option 2 Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.
QD = -2,000 - 100P + 15A + 25PX + 10I (5,234) (2.29) (525) (1.75) (1.5) R2 = 0.85 n = 120 F = 35.25
Your supervisor has asked you to compute the elasticities for each independent variable. Assume the
following values for the independent variables:
Q = Quantity demanded of 3-pack units
P (in cents) = Price of the product = 200 cents per 3-pack unit
PX (in cents) = Price of leading competitor’s product = 300 cents per 3-pack unit
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,000
A (in dollars) = Monthly advertising expenditures = $640.
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 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:
- Outline a plan that will assess the effectiveness of the market structure for the company’s operations. 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.
- Analyze the short run and long cost functions for the low-calorie microwaveable food company given the cost functions below and 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
- Determine the Average Total Cost function (ATC) where ATC = TC/Q.
- Determine the quantity (Q) associated with minimum ATC. (Hint: ATC is minimized when ATC = MC).
- Determine the minimum value of ATC.
Remember that to be profitable, the product’s price (P) must be greater than its average total cost (ATC) at the optimal level of output (Q).
- 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.)
- Suggest one (1) pricing policy that will enable your low-calorie microwavable food company to maximize profits. Provide a rationale for your suggestion. (Hint: In Assignment 1, you determined your firm’s market demand equation. Now you need to and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of 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.
Hint: 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. Is your price higher or lower? What about the quantity?
- Outline a plan, based on the information provided in the scenario that 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.
(a) 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.
(b) 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. (Why would this be a valid assumption?)
- 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.
- Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.
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