Due to changes in the low calorie, frozen, microwavable industry's market structure, the firm-specific demand equation for our hypothetical company has shifted outward and is now:
QD = 350,000 - 100 P
This function generates the following Marginal Revenue Function (MR):
MR = 3500-0.02Q
Write a six to eight (6-8) page paper in which you:
1. Outline a plan that will allow you to identify the market structure in which your company now operates. Comment on the relevant elasticity results from Assignment 1 and your research into two (2) of leading competitors in this industry, taking note of their pricing strategies, profitability, and their relationships within the industry (worldwide).
Note: In Assignment 1, the assumption was that the market structure was perfectly competitive. Changes in the market now suggest it is imperfectly competitive and that your firm now has substantial 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 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 major short run cost functions for this firm assuming they are represented by the equations below. Suggest substantive ways in which you may use this information 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
o Hints: What is the equation for average total costs? How is this useful? What is the output level and dollar value associated with minimum average total cost and minimum average variable costs?
4. Determine the possible circumstances under which your firm should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response.
o (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. Determine the firm's profit maximizing price and output level of output using the golden rule: MR = MC, and/or suggest an alternative pricing policy that will enable the firm to maximize profits. Provide a 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 operating at its optimal scale (min. ATC = min. LRATC), is the firm earning positive or negative profits in the short run? Is this profitability likely to change in the long run?
o Hint: To calculate profit in the short run, use the cost, price, and output levels you generated in part 5.
o 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.