Using Regression Results And Other Computations From Ass
Using The Regression Results And Other Computations From Assignment 1
Using the regression results and other computations from Assignment 1, determine the market structure in which the low-calorie food company now 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: 1. 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 Q D equal to Q S .
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 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. Total Cost: TC = 160,000,000 – 115.56Q + 0.01111Q 2 Variable Cost : VC = – 115.56Q + 0.01111Q 2 Marginal Cost: MC = -115.56 + 0.02222Q More specifically: a. Write the equation for the Average Total Cost function (ATC). (Hint: ATC = TC/Q.) b. Determine the quantity (Q) associated with minimum ATC. (Hint: ATC is minimized when ATC = MC). c. 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). 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 microwavable food company to maximize profits. Provide a rationale for your suggestion. (Hint: In Assignment 1, you determined your firm’s market demand equation to be Q D = 211,P. This is equivalent to the inverse demand equation: P = 21,100 – 0.10 Q. Since Total Revenue (TR) is P x Q, your firm’s Total Revenue (TR) and Marginal Revenue (MR) functions are: Total Revenue: TR = (P*Q) = 21,100 Q – 0.10 Q 2 Marginal Revenue: MR =(dTR/dQ) = 21,100 – 0.20 Q 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? 6. 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.
Hints: (a)Calculate profit in the short run by using the price and output levels you generated in part 6. [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 3 and assuming that the selling environment will likely be very competitive. (Why would this be a valid assumption?) Remember that increasing competition in the long run drives the market price (P) down until it is equal to minimum ATC in the industry. 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.
Paper For Above instruction
Introduction
The analysis of market structures plays a crucial role in guiding strategic decision-making for firms operating in competitive environments. The low-calorie microwavable food industry has evolved from a seemingly perfect competition scenario to a more monopolistic or oligopolistic market, influenced by shifts in industry dynamics, consumer preferences, and international competition. This paper aims to determine the current market structure, explore factors that caused this change, analyze cost functions, and provide strategic recommendations based on economic principles and recent industry research.
Assessment of Market Structure
Based on the regression results and industry analysis, the low-calorie food company now appears to operate within an imperfectly competitive market—most likely monopolistic competition or oligopoly—with significant market power in setting prices. Unlike the original assumption of perfect competition, where prices are dictated by market equilibrium (Q_D = Q_S), the current environment allows the firm to influence pricing, aligning with the principles of imperfect competition (Pindyck & Rubinfeld, 2018).
To evaluate the effectiveness of this market structure, a comprehensive plan involving market analysis, competitor benchmarking, and pricing strategy assessment is essential. This includes analyzing demand elasticity, market share, and barriers to entry, as well as conducting scenario analyses under various competitive dynamics. Market power enables strategic pricing, product differentiation, and targeted marketing, which should be monitored regularly through performance metrics such as profit margins, market share, and customer loyalty.
Factors Contributing to Market Change
Two key factors potentially responsible for the transition from perfect competition to an imperfect market are:
1. Product Differentiation and Brand Loyalty: As companies invest in branding, packaging, and product innovation, they reduce substitutability, creating a market with differentiated products and market power.
2. Market Entry Barriers: Increased capital investment, technological challenges, and distribution channels may discourage new entrants, consolidating market power among existing firms.
These factors likely impact the company's operations by enabling price-setting capabilities that can enhance profitability but may also reduce competitive pressures, potentially leading to reduced overall market efficiency and consumer surplus (Stigler, 1968).
Cost Function Analysis and Business Decisions
Using the provided cost functions, the analysis of short-term and long-term cost behavior is vital for strategic planning:
- Total Cost: TC = 160,000,000 – 115.56Q + 0.01111Q^2
- Variable Cost: VC = –115.56Q + 0.01111Q^2
- Marginal Cost: MC = –115.56 + 0.02222Q
a. Average Total Cost (ATC) Equation:
\[ ATC = \frac{TC}{Q} = \frac{160,000,000 – 115.56Q + 0.01111Q^2}{Q} = \frac{160,000,000}{Q} - 115.56 + 0.01111Q \]
b. Quantity for Minimum ATC:
Setting \( ATC = MC \):
\[ \frac{160,000,000}{Q} - 115.56 + 0.01111Q = -115.56 + 0.02222Q \]
Simplifying:
\[ \frac{160,000,000}{Q} + 0.01111Q = 0.02222Q \]
\[ \frac{160,000,000}{Q} = 0.01111Q \]
\[ 160,000,000 = 0.01111Q^2 \]
\[ Q^2 = \frac{160,000,000}{0.01111} \approx 14,403,243,243 \]
\[ Q \approx 120,014 \]
Thus, the profit-minimizing or cost-efficient output occurs at approximately 120,014 units.
c. Minimum ATC:
Plugging \( Q \approx 120,014 \) into ATC:
\[ ATC \approx \frac{160,000,000}{120,014} - 115.56 + 0.01111 \times 120,014 \]
\[ ATC \approx 1333.33 - 115.56 + 1332.36 \]
\[ ATC \approx 2549.13 \]
This is the lowest average total cost, indicating the most efficient scale for production in the long run.
To ensure profitability, the firm's price must be above this ATC at the optimal output. Therefore, establishing pricing strategies aligned with cost structures is fundamental for profitability.
Impact of Market Changes on Business Operations
The shift from perfect competition to market power impacts operational strategy by enabling the firm to set higher prices; however, it necessitates careful cost management to sustain margins. The increased market power also means that the firm can influence supply and demand dynamics, leading to more strategic marketing and product differentiation efforts. Furthermore, the company must remain vigilant to maintain its market position amid global competitors, especially considering the industry’s oligopolistic tendencies.
Market Discontinuation Conditions and Management Strategies
The company should contemplate discontinuation if the price falls below the minimum short-run variable cost (AVC) or if the price cannot cover average total costs in the long run. Persistent losses, declining demand, or intensifying competition driven by new entrants or substitute products are signals to consider strategic retreat (Baumol & Blinder, 2015).
To confront these challenges, management should evaluate:
- Cost reduction strategies through process improvements
- Diversification of product lines to tap into new markets
- Investment in marketing to boost brand loyalty and demand
- Exploring technological innovations to enhance efficiency
These actions aim to either restore profitability or strategically exit declining markets while minimizing losses.
Pricing Policy for Profit Maximization
Given the inverse demand function \( P = 21,100 - 0.10Q \), setting \( MR = MC \) guides optimal pricing:
\[ 21,100 - 0.20Q = -115.56 + 0.02222Q \]
\[ 21,100 + 115.56 = 0.24222Q \]
\[ 21,215.56 = 0.24222Q \]
\[ Q \approx 87,591 \]
Corresponding price:
\[ P = 21,100 - 0.10 \times 87,591 \approx 21,100 - 8,759.1 \approx \$12,340.90 \]
This pricing approach ensures maximum profit through marginal analysis, allowing the company to adjust prices dynamically based on demand elasticity and cost structures.
Performance Evaluation and Long-term Planning
An effective financial performance plan involves:
- Short-term profit analysis using current pricing and output figures
- Long-term profit projection based on expected industry competition
- Cost control measures and productivity improvements
- Market share analysis and customer profitability
- Scenario planning to adapt to demand fluctuations and cost changes
By comparing short-term actual performance against targets and adjusting operations accordingly, management can ensure sustainability and targeted growth (Brigham & Houston, 2019).
Strategies for Profitability and Stakeholder Value
To bolster profitability, the company should consider:
1. Product Innovation: Developing new or improved products that command premium pricing and increase market share.
2. Cost Optimization: Streamlining supply chains and operational processes to reduce costs and increase margins.
Implementation plans should include investment in R&D, process re-engineering, and continuous market research to adapt to evolving consumer preferences and technological advancements.
Conclusion
The low-calorie microwavable food industry has transitioned into an environment characterized by market power rather than perfect competition, necessitating strategic adjustments in pricing, cost management, and competitive positioning. Through careful analysis of cost functions, demand, and industry dynamics, the firm can optimize its operations and profitability. Ongoing evaluation and adaptation, driven by sound economic and managerial principles, are essential to sustain competitive advantage and shareholder value.
References
- Baumol, W. J., & Blinder, A. S. (2015). Economics: Principles and Policy. Cengage Learning.
- Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
- Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics. Pearson Education.
- Stigler, G. J. (1968). The organization of industry. The Bell Journal of Economics and Management Science, 139-154.
- Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W. W. Norton & Company.
- Mankiw, N. G. (2021). Principles of Economics. Cengage Learning.
- Frank, R., & Bernanke, B. (2021). Principles of Economics. McGraw-Hill Education.
- Hirschman, A. O. (1970). Exit, Voice, and Loyalty. Harvard University Press.
- Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. McGraw-Hill Education.
- Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.