Expert answer:What will be the operations decision?
Solved by verified expert: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 + 0.0063212Q2 VC = 100Q + 0.0063212Q2 MC= 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. (Hints: 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. (Hints: 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.
assignment1_demand_estimation_eco550.docx
Unformatted Attachment Preview
Running Header: DEMAND ESTIMATION
Demand Estimation
By: Diana M Jones
Professor Diana Bonina
ECO550: Managerial Economics and Globalization
October 20, 2017
1
DEMAND ESTIMATION
2
Elasticities for each independent variable
Option 1
QD = – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
P= 500, PX= 600, A= 10,000, I= 5,500, M= 5,000
Replacing the values in the above equation;
QD = – 5200 – 42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25 (5,000)
QD= 17,650
Price elasticity (Ep) is calculated by; (P/Q) (∆Q/∆P)
Ep= (P/Q) (∆Q/∆P)
(∆Q/∆P)= -42, from the regression equation
Ep= (500/17,650) (-42) = -1.19
Cross-price elasticity= 20(600/17,650) = 0.68
Elasticity of Microwaves in the market= (0.25) (5000/17650) = 0.07
Income elasticity= (5.2) (5500/17650) = 1.62
Advertisement elasticity= (0.2) (10,000/17650) = 0.11
Implications for the elasticities for the business in terms of short-term and long-term
pricing strategies
The price elasticity -1.19. Price elasticity an indication of price sensitivity. A price
elasticity of -1.19 shows that a one percent rise in the price of particular goods results in a
DEMAND ESTIMATION
3
decrease of the quantity of demanded of the same goods by 1.19%. Therefore, the demand for
the goods is relatively elastic since relative changes in prices lead to a change in the quantity of
goods demanded.
The cross-price elasticity is 0.68. Cross-price elasticity measures the changes in the
quantity of goods demanded when there is a change in price of a complementary or a substitute
good. A cross-price elasticity of 0.68 implies that a one percent increase in the price of
competitor’s goods results to a 0.68 increase in the quantity of the goods demanded (McGuigan,
Moyer & Harris, 2013).
The elasticity of Microwave ovens in the region market is 0.07. This means that a one
percent increase in the number of microwave ovens in the market results in an increase in the
quantity demanded by 0.07%. The demand is thus inelastic. Besides, it means that in setting up a
pricing strategy, the focus should not be primarily the quantity of ovens as the significant impact
is low.
The income elasticity of demand is 1.62. An income elasticity of 1.62 implies that a one
percent increase in the income of the customers leads to an increase in the quantity of the goods
demanded. Therefore, the demand is elastic.
The advertisement elasticity is 0.11. An advertisement elasticity of 0.11 implies that a
one percent increase in the advertising campaign costs results in a 0.11% increase in the quantity
of goods demanded. Therefore, the demand is inelastic. There is no significant relationship
between the increase in the advertising expenses and the demand for the goods.
DEMAND ESTIMATION
4
Recommendations on whether the firm should or should not cut its price to increase its
market share
The price elasticity of demand is -1.19. The meaning of this is that a one percent decrease
in the prices of goods results in an increase of 1.19 of the quantity of goods demanded.
Therefore, cutting the prices of the goods increases the demand for the goods thus there is an
implication for an increase in the market share of the organization.
Plot the demand curve
Assume price changes are
100, 200, 300, 400, 500, 600 cents.
QD = – 5200 – 42(P) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25 (5,000)
QD= 38,650-42P, QD, when the price is 600, = 38, 650- 42(600) = 13450
Replacing P in the above equation for all the price values, the following data is derived;
Price
100
200
300
400
500
600
Quantity Demanded
34450
30250
26050
21,850
17,650
13450
DEMAND ESTIMATION
5
Quantity Demanded
40000
30000
20000
10000
0
0
100
200
300
400
500
600
700
Plot the supply curve
Supply function=Q= -7909.89+79.1P
With the same prices of 100, 200, 300, 400, 500, and 600, the values with be substituted in the
supply curve;
Price
100
200
300
400
500
600
Quantity Supplied
0.11
7910.1
15820
23730
31640
39550
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
0
100
200
300
400
500
600
700
DEMAND ESTIMATION
6
The equilibrium price and quantity.
QD= 38,650-42P
QS= -7909.89+79.1P
At equilibrium, quantity demanded=quantity supplied
38,650-42P= -7909.89+79.1P
38650+7909.89= 42P+79.1P
46560=121.1P
P= 384.47
For Equilibrium quantity
= 38,650-42(384.47) = 22502 Units
The equilibrium price $384.47 while the equilibrium quantity is 22502 Units
The Demand curve and the Supply curve meets at P= $384.47 and Q= 22,502 Units
Demand and supply curve
50000
40000
30000
20000
10000
0
0
100
200
300
Quantity Demanded
400
500
Quantity supplied
600
700
DEMAND ESTIMATION
7
Significant factors that could cause changes in supply and demand for low-calorie, frozen
microwavable food
Factors such as the income of the consumers and their tastes and preferences cause a
change in the quantity demanded of the good. On the other hand, an increase or a decrease in the
costs of production have an impact on the supply of the good. Higher costs of production result
in an increase in supply price, which in term affects the prices of the goods to the consumers
(Ehrenberg & Smith, 2016).
Crucial factors that cause rightward shifts and leftward shifts of the demand and
supply curves for the low-calorie, frozen microwavable food
A rightward shift in the demand curve implies a rise in the quantity of goods demanded.
The increase in income, an increase in the price of substitutes, and a fall in the price of
complementary goods cause a rightward shift of the demand curve. On the other hand, a decrease
in the prices of substitutes, a rise in the prices of complementary goods, shifting of tastes to the
lesser popularity and future expectations that demotivate consumers from buying the product
cause a leftward shift in the demand curve (Bas, Mayer & Thoenig, 2017).
A rightward shift in the supply curve can be due to lower prices of raw materials and
capitalizing on better technology. On the other hand, a leftward shift can be initiated by a rise in
the prices of the outputs and expensive technology (Bas, Mayer & Thoenig, 2017).
DEMAND ESTIMATION
8
References
Azevedo, E. M., & Leshno, J. D. (2016). A supply and demand framework for two-sided
matching markets. Journal of Political Economy, 124(5), 1235-1268.
Bas, M., Mayer, T., & Thoenig, M. (2017). From micro to macro: demand, supply, and
heterogeneity in the trade elasticity. Journal of International Economics, 108, 1-19.4
Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy.
Routledge.
McGuigan, J., Moyer, R. C., & Harris, F. (2013). Managerial economics: applications,
strategies and tactics. Nelson Education.
…
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