ECO 550 ASSIGNMENT 2 MODIFIED STRAYER UNIVERSITY - 44409

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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 QDequal 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.

 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 + 0.01111Q2

Variable Cost: VC = – 115.56Q + 0.01111Q2

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 QD = 211,000 -10P. 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 Q2

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.

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