Use The Updated Demand And Marginal Revenue Functions

Use The Updated Demand Qd And Marginal Revenue Mr Functions Below

Use the updated demand (QD) and marginal revenue (MR) functions below to complete this assignment. QD = 350, P This function generates the following Marginal Revenue Function (MR): MR = 3500-0.02Q 1. Outline a plan that allows you to identify the new market structure of this firm (monopolistic competition, oligopoly, monopoly, or perfect competition). Comment on at least two leading competitors in this industry, taking note of their pricing strategies, profitability, and/or relationships within the industry and worldwide. Note: In Assignment 1, the assumption was that the market structure was perfectly competitive.

Changes in the market now suggest that this firm has substantially more 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 may account for this change. 3. Analyze the major short run cost functions for this firm assuming they are represented by the equations below (where TC is total cost, VC is variable cost, MC is marginal cost, and Q is quantity).

How can this information be used to make production decisions in the short-run and possibly 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? What is the output level and dollar value associated with minimum average total cost. Why is this useful? 4. Under what circumstances should this firm discontinue operations in the short run (?) and in the long run?

Explain. 5. Determine the firm’s profit maximizing price and output level using the golden rule: MR = MC, and/or suggest an alternative pricing policy that will enable the firm to maximize profits. Provide the rationale for your suggestion. 6.

Outline a plan, or use your results above, to evaluate this firm’s financial performance. Consider all the key drivers of performance, such as total revenue, total cost, total profit, etc. Assuming production is already at its optimal long run scale, is the firm earning positive or negative profits in the short run? Is this profitability likely to change in the long run? · 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 down or up to zero if there are no significant market barriers to entry or exit. 7. Recommend and justify two (2) actions the firm could take to improve its profitability over the long run. 8. References: Use at least five (5) quality academic resources in this assignment. All references must be cited in the text.

Paper For Above instruction

Introduction

The determination of a firm's market structure plays a crucial role in shaping its strategic decisions, including pricing, production, and market entry or exit. The transition from perfect competition to a more oligopolistic or monopolistic structure suggests fundamental changes in market dynamics. This paper aims to analyze these shifts using the provided demand, marginal revenue, and cost functions, and to develop actionable insights for the firm's optimal strategies and long-term profitability.

Identifying the New Market Structure

To identify the firm’s present market structure, one must analyze the demand and marginal revenue functions, along with the firm's pricing power. The demand function QD = 350, with an associated MR = 3500 - 0.02Q, suggests a downward-sloping demand curve with a significant degree of market power. Unlike a perfectly competitive market—characterized by a horizontal demand curve where price equals marginal cost—this firm can set prices above marginal costs, indicating some monopoly or monopolistic tendencies.

In monopolistic competition, firms have some pricing power but face competition from similar products, which constrain prices. An oligopoly features a few large firms exerting mutual influence, often leading to strategic behavior. A monopoly, on the other hand, represents a single dominant firm with substantial market power, setting prices to maximize profits. Based on the MR function's slope and the capacity for setting a profit-maximizing price, the firm appears to have monopolistic features, possibly in an oligopolistic context with some competitive elements.

Two leading competitors in such an industry might include an established regional monopoly and a dominant multinational firm. The regional monopoly could leverage local market power by employing aggressive pricing strategies, perhaps setting prices above average total costs to maximize profits. The multinational competitor might engage in strategic pricing to penetrate or defend market share, utilizing cross-subsidization or differentiated products. Their strategies influence industry profitability and worldwide competitive positioning, impacting the local firm's market power.

Factors Accounting for Changes in Market Structure

Given the shift from perfect competition outlined in Assignment 1, two key factors likely underpin the changed market structure:

1. Market Entry Barriers: Increased capital requirements, regulatory restrictions, or access to distribution channels could have raised entry barriers, reducing the number of competitors and shifting the industry towards oligopoly or monopoly. For example, significant economies of scale or exclusive licenses might prevent new entrants.

2. Product Differentiation or Innovation: Advancements in technology or branding efforts could have differentiated the firm's products from competitors, reducing price elasticity and increasing market power. Such differentiation allows the firm to command higher prices, moving away from the ideal of perfect competition where products are homogeneous.

These factors diminish the threat of new entrants and intensify the market power of existing firms, thus altering the competitive landscape.

Cost Analysis and Production Decisions

Utilizing the provided cost functions:

- Total Cost (TC): \( TC = 160,\!000,\!000 + 100Q + 0.00632Q^2 \)

- Variable Cost (VC): \( VC = 100Q + 0.00632Q^2 \)

- Marginal Cost (MC): \( MC = 100 + 0.0126Q \)

The average total cost (ATC) can be derived by dividing TC by Q:

\[ ATC = \frac{TC}{Q} = \frac{160,\!000,\!000}{Q} + 100 + 0.00632Q \]

Calculating the minimum of ATC involves differentiating ATC and setting the derivative to zero:

\[ \frac{d(ATC)}{dQ} = -\frac{160,\!000,\!000}{Q^2} + 0.00632 = 0 \]

\[ \Rightarrow Q^2 = \frac{160,\!000,\!000}{0.00632} \]

\[ \Rightarrow Q \approx \sqrt{\frac{160,\!000,\!000}{0.00632}} \approx 159,206 \]

At this production level, the firm minimizes its average total costs, which is vital for pricing and profitability. Producing at this quantity enables the firm to operate efficiently and sustain competitive pricing.

In the short run, if the firm's price falls below average variable costs, it should shut down to avoid losses. In contrast, in the long run, continued losses threaten viability, prompting exit unless conditions improve or cost structures change.

Profit Maximization and Optimal Pricing

To locate the profit-maximizing output, equilibrium occurs where MR equals MC:

\[ MR = 3500 - 0.02Q \]

\[ MC = 100 + 0.0126Q \]

Set MR = MC:

\[ 3500 - 0.02Q = 100 + 0.0126Q \]

\[ 3400 = 0.0326Q \]

\[ Q^* \approx \frac{3400}{0.0326} \approx 104,291 \]

Using the demand function \( P = \text{inverse demand} \), which is not explicitly provided but can be inferred from QD = 350 with the price \( P \), one can estimate the profit-maximizing price. Assuming the demand is linear, \( P = \frac{350}{Q} \) (hypothetically), then at \( Q^* \):

\[ P^* \approx \frac{350}{104,291} \]

which suggests a very low price if the demand function is linear—indicating a need to clarify the demand relationship for precise pricing.

Alternatively, the firm should set prices that maximize the difference between total revenue and total cost, considering the marginal costs and the elasticity of demand. Given the estimated Q, responsive pricing strategies could involve strategic markup above marginal cost to maximize profits. For example, considering markup rules derived from Lerner index or other approaches could be fruitful.

Financial Performance Evaluation

Given the production level at Q and the associated costs, the firm’s short-term profitability can be evaluated using total revenue minus total costs for the profit-maximizing output. Assuming a realized price \( P^ \), profit \( \pi \) becomes:

\[ \pi = P^Q^ - TC(Q^*) \]

Calculating this precisely requires the explicit demand function; however, assuming the firm operates at economic efficiency, positive profits indicate financial strength, whereas negative profits suggest losses, compelling adjustments.

In the long run, if no significant market barriers exist, profits tend toward zero as new entrants erode market share. The firm’s sustainability depends on its ability to innovate, reduce costs, or differentiate, thus maintaining positive profits or establishing a sustainable competitive advantage.

Strategies for Long-term Profitability

To enhance profitability, the firm should consider:

1. Cost Reduction: Investing in technology to streamline operations and reduce variable costs, shifting the cost curve downward and improving margins.

2. Product Differentiation: Developing unique features or branding to increase demand elasticity, allowing for higher prices without losing customers.

These strategies can position the firm for sustained profitability, leveraging market power and efficiency advantages.

Conclusion

The analysis indicates a shift from a perfectly competitive market to a structure with greater market power, likely monopolistic or oligopolistic. This transition is driven by factors such as increased barriers to entry and product differentiation. Cost functions reveal opportunities for optimizing production to minimize costs and maximize profits. Strategic pricing based on marginal revenue and cost analysis can assist in profit maximization. Long-term sustainability hinges on cost efficiency and product innovation, along with proactive market positioning.

References

• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Perloff, J. M. (2016). Microeconomics (8th ed.). Pearson.
• Stiglitz, J. E., & Walsh, C. E. (2002). Economics. W.W. Norton & Company.
• Crane, F. G., & Mathews, G. (2017). Economics of Strategy. Routledge.