Assignment 2: Operations Decision Due Week 6 and worth 300 points
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 frozen, 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. 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. 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.
- 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 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 the short-run and the long-run.
TC = 160,000,000 + 100Q + 0.0063212Q2VC = 100Q + 0.0063212Q2MC= 100 + 0.0126424Q
- 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, 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.)
- 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.)
- 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.
Your assignment must follow these formatting requirements:
- Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
- Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
Assignment 2 Calculations
The short-run cost function:
TC = 160,000,000 + 100Q + 0.0063212Q2
ATC = TC/Q = 160,000,000/Q + 100 + 0.0063212Q
VC = 100Q + 0.0063212Q2
FC = 160,000,000
MC = ΔTC/ΔQ = 100 + 0.0126424Q
The long-run cost function:
TC = 100Q + 0.0063212Q2
AC =100Q/Q + 0.0063212Q2/Q = 100 + 0.0063212Q
VC = 100Q + 0.0063212Q2
AVC = VC/Q = (100Q + 0.0063212Q2)/Q
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.
From assignment 1:
Qd = 38650 – 42P
P = 38650/42 – Q/42 = 920.238 – 0.0238 Q
MC = 920.238 – 0.0476 Q
In perfectly competitive market; P = MC, therefore;
920.238 – 0.0238 Q= 100 + 0.0126424Q
820.238 = 0.0364424 Q
Q = 22507.8
P = 920.238 – 0.0238(22507.8) = 384.55
In a noncompetitive market which is the condition in assignment 2:
MR = MC
TR = P.Q = 920.238 Q– 0.0238Q2
MR = 920.238 – 2(0.0238) Q = 920.238 – 0.0476 Q
MR = MC
920.238 – 0.0476 Q = 100 + 0.0126424Q
0.0602424Q = 820.238
Q = 820.238/0.0602424 = 13,615.63 units
P= 920.238 – (0.0238 * 13,615.63) = 596.19 cents
So a higher price with lower quantity is charged in a noncompetitive market.
Profit in assignment 1 when the market is perfectly competitive:
Profit = P.Q – TC = (384.55) (22507.8) – [160,000,000 + 100 (22507.8) + 0.006321(22507.8)2] = 8,655,374.49-165,453,005 = -156,797,630.81 which is a loss.
Using the data to find the profit in assignment 2:
Profit in the short run = P.Q – TC = (596.19) (13,615.63) – [160,000,000 + 100 (13,615.63) + 0.006321(13,615.63)2] = 8,117,502.45 – 162,533,383.99 = -154,415,881.54 (which is a loss)
Profit in the long run = P.Q – TC = (596.19) (13,615.63) – [100 (13,615.63) + 0.006321(13,615.63)2] = 8,117,502.45 – 2,533,383.99 = 5,584,118,46
What are the values of ATC and AVC at the output level of 13,615.63?
ATC = TC/Q = [160,000,000 + 100 (13,615.63) + 0.006321(13,615.63)2] / 13615.63 = 162,533,383.99 / 13615.63 = 11937.27
AVC = 2533383.99 / 13615.63 = 186.06
P = 596.19
Price is between ATC and AVC so they better to stay open in the short run.
P – ATC= 596.19 – 11937.27 = 11341.08 loss per unit
11341.08 * 13615.63 = 154415881.54 total loss if they operate
160,000,000 total loss if they shut down