From Assignment 1, you will use the following information:
Qs = -7909.89 + 79.1P
Qd = 38650 – 42P
P = 384.48 cents and Q = 22,502 units
You should also use the following rules for profit maximization:
P = MR = MC in perfect competition
MR = MC in imperfect competition
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. The market structure in the first assignment was competitive. This means that the firm does not have control over the price and it has to charge the equilibrium price. 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.
- Since the company has control over the price, it has to decide how much to charge and how much to produce to maximize profit.
- The profit-maximizing/loss-minimizing quantity and price can be determined by setting the MR = MC. This involves the following.
o Find the total revenue: TR = P x Q
o Find the marginal revenue by calculating the derivative of the total revenue function.
o Set MR equal to the provided MC function and solve for Q, and then for P.
- Based on the results, the company should make a decision to continue producing or shut down.
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.
- Consider the change in the degree of competition.
- Review the sections “Industry Performance” and “Competitive Landscape” in the IBISWorld report provided.
- Factors that might have caused change could be for example consolidation of the industry, i.e., firms become bigger and have now some control on the price. Also, firms can differentiate their product from the products of their competitors, which again results in more control over the price. Firms’ actions are interdependent and now their decisions are affected not just by the demand and supply conditions, but by what moves their major competitors make. These are just examples. You might come up with other factors.
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 short and the long-run.
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
- To maximize profit, the firm has to find ways to maximize its total revenue and minimize its cost. You should also consider the difference between short and long run. In the short run, at least one of the costs is fixed. In the long run, all costs can be changes, i.e., all costs are variable. A review of the IBISWorld Industry Report on the frozen food production in the US can also help you answer this question. The cost functions affect the profit. The cost functions are to be used to answer question 4 as well.
- Using the provided cost data for the firm, determine whether the firm is making a profit or a loss by charging the equilibrium price determined in Assignment 1.
o Calculate the total revenue.
o Calculate the total cost.
o Find the difference between TR and TC, which is the profit or the loss.
o Review the section “Cost Structure Benchmarks” (p. 22) in the IBISWorld report.
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.)
- Here, you have to find the profit maximizing or loss-minimizing quantity and price. Then, determine whether the company is making a profit. To find the value of Q and P, you should use the marginal rule MR = MC.
- MC function is given.
- You should calculate MR by using the demand function from Assignment 1: Qd = 38,650 – 42P.
o First, inverse the demand function to show the price in terms of quantity: P = 920.238 – 0.0238Q.
o Then, find the TR function, which is equal to price times quantity TR = (920.24 – 0.0238Q)*Q = 920.24Q – 0.0238Q2.
o Finally, find MR which is the derivative of TR with respect to quantity, i.e., MR = 920.238 – 0.0476Q.
- Next, set MR equal to the MC given in the second assignment and solve for the profit maximizing or loss minimizing Q and P.
- When you find the values of Q and P, you can plug in the number for Q into the TR function to find the TR and in the TC function, to find the TC.
- Then subtract TC from TR to find the total profit.
o If you get a negative number, the firm is making a loss.
o If the number is positive, the firm is making a profit.
- If the firm is making a loss, you should figure out whether the firm should continue to produce at a loss in the short run, or shut
o To answer this question, you should compare the TR with VC, or price with AVC. If the firm is making a loss and the TR is higher than VC or the price is higher than the AVC, then it would be better off producing rather than shutting down because it will be able to cover some of its fixed cost. But if TR is smaller than VC, or if price is smaller than AVC, the firm will be better of shutting down.
Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.
- 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.)
- Use the profit-maximizing rule MC = MR to find the price and quantity that maximize profit.
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.
- 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.)
- You can also review the section “Key Statistics” on p. 38 of the IBISWorld Industry Report Report.
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.
- Review the sections “Industry Performance” and “Products and Markets” in the IBISWorld report.