Eco 550 Assignment 1 Demand Estimation Problem

Question description

Assignment 2: Operations Decision

Using the regression results and the other computations from Assignment 1, determine the market structure in which this frozen, low-calorie microwavable food company now operates.

ECO550- Assignment 1(demand estimation.docx

In assignment #1, the company estimated a demand curve and used a marginal cost curve as its supply curve. You determined the equilibrium in the market where P =MC [or Qs = Qd]. You calculated the various elasticities using the estimated demand at its current price of 500 cents. While not required, if you look at the own price elasticity at the equilibrium price and quantity solved for in Assignment #1 you will notice a problem for the firm if it thinks it is operating in a competitive market.

Now that you know that the firm faces a downward sloping demand curve and that it has pricing power, you are being asked to rethink how the firm should behave in the market as it actually used its pricing power to determine the profit maximizing price and output in this assignment.

1.  Use the Internet to research two (2) leading competitors in the low-calorie microwavable food industry, and take note of their pricing strategies, profitability, and their relationships within this industry (within the USA and worldwide). Use the IBIS Report for the Frozen Food Production Industry (SIC Code 31141) to be provided by your instructor.

===è Please read the attached IBIS report on Frozen Food Industry in U.S.

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 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.

===è See the attached spreadsheet

Assignment 2x.xls

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.

TC = 160,000,000 + 100Q + 0.0063212Q2

·  ===è So,

o  TFC = 160,000,000

o  TVC = 100Q + 0.0063212Q2

o  MC= 100 + 0.0126424Q

More specifically:

a.  Determine the Average Total Cost function (ATC), AVC, and AFC

·  ===èSee spread sheet for the calculation of Q* = 13,611

·  ===èATC= TC/Q = (160,000,000)/Q + 100 + 2 * 0.0063212Q = 1,348

·  ===èAVC= TVC/Q = 0.71 = 186.04

·  ===èAFC= TFC/Q = 1,175.49

b.  Determine the quantity (Q) associated with minimum ATC.

·  ===è See spread sheet for the calculation

·  ===èATC is minimized when ATC = MC

·  Determine the minimum value of ATC

·  ===èATC = 736

·  ===èRemember, for a firm to be profitable, the product’s price (P) must be greater than its average total cost (ATC) at the optimal level of output Q*.

2.  Suppose the business operations have now changed from the market structure analyzed in the activities required for the first assignment due to this new data about costs. Determine two (2) likely factors that might have caused the changed behavior. Predict the primary manner in which this change would likely impact business decisions in the new market environment.

·  ===è Market structure characteristics

Week 5.1-Market Structure.ppt

·  ===è The change in market structure from perfect competition to monopolist competition implies that the firm is now has monopoly power i.e., it has some control over its own price.  As such, the rule of profit maximization is still MR=MC, however, since the demand is downward sloping P>MR, the firm can now make above normal profit. 

·  ===èThere many factors that may have caused the change in the type of market structure.  The most significant factor of change is the ability of the firm to differentiate its products from its rivals.

3.  Analyze the major short-run and long-run production and cost functions implied by this new cost data for the frozen, low-calorie microwaveable food company. Use the information contained in the IBIS report. Suggest substantive ways in which the frozen, low-calorie food company may use this information in order to make decisions in both the short-run and the long run.

·  ===èPlease the attached theoretical short-run cost and long-run cost analysis and read the information contained in the IBIS report.

Assignment 2-Frozen Food Production in the US industry report.pdf

Assignment 2-SpecializedIndustryReportList.pdf

4.  Determine the possible circumstances under which the company should discontinue operations. While no specific fixed or total cost data are provided, use the newly provided cost data above and your knowledge from the textbook on the relation of fixed and variable costs to revenue to develop estimates that might suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response.

·  ===èTo be profitable, the firm’s product’s price (P) must be greater than its average total cost (ATC) at the optimal level of output (Q) i.e., P>ATC.

·  ===èA business discontinues its operations in the short-run if P>AVC or in the long-run P>ATC.  So, the shutdown ruleis P < AVC

5.  Suggest one (1) pricing policy that will enable your frozen, low-calorie microwavable food company to maximize profits. Provide a rationale for your suggestion that will involve comparison of the first assignments two possible price and quantity pairs with the new optimum presented here in Assignment #2

·  ===èRegardless of type of market structure, the profit-maximization level of output is always achieved at the point where MC=MR The significant feature of perfect competition is the lack of barriers to entry resulting in a large number of small firms producing identical products.   In such a market structure no single firm has the ability to influence the market price so firms are price takers. The significant feature in a monopolistic competition is product differentiation based on physical characteristics, location, and time.  Product differentiation gives firms market power and hence more options in pricing practices such as randomized pricing, block pricing, two-part pricing, commodity bundling, peak-load pricing, cross subsidies, premium pricing, cost/plus pricing, penetration pricing, transfer pricing, etc. 

6.  Outline a plan, (based on the original information provided in the first assignment along with the IBIS report industry cost data for the firm), 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.

o  Using the price and output levels generated in part 5, calculate the short run profit,

o  Using the output level generated in part 5, cost data in part 3, and assuming a very competitive market, calculate profit in the long run.

7.  Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders in line with the recent history and forecast future behavior for the Frozen Food Production Industry [SIC Code 31141] as outlined in the IBIS report. 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.

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.

Points: 300

Assignment 2: Operations Decision

Criteria

Unacceptable

Below 70% F

Fair

70-79% C

Proficient

80-89% B

Exemplary

90-100% A

1. Outline a plan that will assess the impact of the market structure/cost data for the company’s operations.

Weight: 10%

Did not submit or incompletely outlined a plan that will assess the impact of the market structure/cost data for the company’s operations.

Partially outlined a plan that will assess the impact of the market structure/cost data for the company’s operations.

Satisfactorily outlined a plan that will assess the impact of the market structure/cost data for the company’s operations.

Thoroughly outlined a plan that will assess the impact of the market structure/cost data for the company’s operations.

2. Suppose the business operations have now changed from the market structure specified in the 1st assignment results as a result of the new cost data and demand understanding. 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.
Weight: 10%

Did not submit or incompletely supposed the business operations have now changed from the market structure specified in the 1st assignment results. Did not submit or incompletely determined two (2) likely factors that might have caused the change. Did not submit or incompletely predicted the primary manner in which this change would likely impact business operations in the new market environment.

Partially supposed the business operations have now changed from the market structure specified in the 1st assignment results. Partially determined two (2) likely factors that might have caused the change. Partially predicted the primary manner in which this change would likely impact business operations in the new market environment.

Satisfactorily supposed the business operations have now changed from the market structure specified in the 1st assignment results. Satisfactorily determined two (2) likely factors that might have caused the change. Satisfactorily predicted the primary manner in which this change would likely impact business operations in the new market environment.

Thoroughly supposed the business operations have now changed from the market structure specified in the 1st assignment results. Thoroughly determined two (2) likely factors that might have caused the change. Thoroughly predicted the primary manner in which this change would likely impact business operations in the new market environment.

3. Analyze the major short-run and long-run production and cost functions for the low-calorie microwaveable food company in light of the new data. 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.

Weight: 10%

Did not submit or incompletely analyzed the major short-run and long-run production and cost functions for the low-calorie microwaveable food company. Did not submit or incompletely suggested 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.

Partially analyzed the major short-run and long-run production and cost functions for the low-calorie microwaveable food company. Partially suggested 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.

Satisfactorily analyzed the major short-run and long-run production and cost functions for the low-calorie microwaveable food company. Satisfactorily suggested 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.

Thoroughly analyzed the major short-run and long-run production and cost functions for the low-calorie microwaveable food company. Thoroughly suggested 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.

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.

Weight: 15%

Use the IBIS Report data.

Did not submit or incompletely determined the possible circumstances under which the company should discontinue operations. Did not submit or incompletely suggested key actions that management should take in order to confront these circumstances. Did not submit or incompletely provided a rationale for your response.

Partially determined the possible circumstances under which the company should discontinue operations. Partially suggested key actions that management should take in order to confront these circumstances. Partially provided a rationale for your response.

Satisfactorily determined the possible circumstances under which the company should discontinue operations. Satisfactorily suggested key actions that management should take in order to confront these circumstances. Satisfactorily provided a rationale for your response.

Thoroughly determined the possible circumstances under which the company should discontinue operations. Thoroughly suggested key actions that management should take in order to confront these circumstances. Thoroughly provided a rationale for your response.

5. Suggest and analyze one (1) pricing policy that will enable your low-calorie microwavable food company to maximize profits. Provide a rationale for your suggestion.

Weight: 10%

Did not submit or incompletely suggested and analyzed one (1) pricing policy that will enable your low-calorie microwavable food company to maximize profits. Did not submit or incompletely provided a rationale for your suggestion.

Partially suggested and analyzed one (1) pricing policy that will enable your low-calorie microwavable food company to maximize profits. Partially provided a rationale for your suggestion.

Satisfactorily suggested and analyzed one (1) pricing policy that will enable your low-calorie microwavable food company to maximize profits. Satisfactorily provided a rationale for your suggestion.

Thoroughly suggested and analyzed one (1) pricing policy that will enable your low-calorie microwavable food company to maximize profits. Thoroughly provided a rationale for your suggestion.

6. Outline a plan, based on the information provided in the 1st assignment results and the new data, 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.

Weight: 10%

Did not submit or incompletely outlined a plan, based on the information provided in the 1st assignment results that the company could use in order to evaluate its financial performance. Did not submit or incompletely considered 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.

Partially outlined a plan, based on the information provided in the 1st assignment results that the company could use in order to evaluate its financial performance.  Partially considered 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.

Satisfactorily outlined a plan, based on the information provided in the 1st assignment results that the company could use in order to evaluate its financial performance. Satisfactorily considered 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.

Thoroughly outlined a plan, based on the information provided in the 1st assignment results that the company could use in order to evaluate its financial performance. Thoroughly considered 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.

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.

Weight: 10%

Did not submit or incompletely recommended two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Did not submit or incompletely outlined, in brief, a plan to implement your recommendations.

Partially recommended two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Partially outlined, in brief, a plan to implement your recommendations.

Satisfactorily recommended two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Satisfactorily outlined, in brief, a plan to implement your recommendations.

Thoroughly recommended two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Thoroughly outlined, in brief, a plan to implement your recommendations.

8.5 references
Weight: 5%

No references provided

Does not meet the required number of references; some or all references poor quality choices.

Meets number of required references; all references high quality choices.

Exceeds number of required references; all references high quality choices.

9.Writing Mechanics, Grammar, and Formatting
Weight: 5%

Serious and persistent errors in grammar, spelling, punctuation, or formatting.

Partially free of errors in grammar, spelling, punctuation, or formatting.

Mostly free of errors in grammar, spelling, punctuation, or formatting.

Error free or almost error free grammar, spelling, punctuation, or formatting.

10.Appropriate use of APA in-text citations and  reference section
Weight: 5%

Lack of in-text citations and / or lack of reference section.

In-text citations and references are provided, but they are only partially formatted correctly in APA style.

Most in-text citations and references are provided, and they are generally formatted correctly in APA style.

In-text citations and references are error free or almost error free and consistently formatted correctly in APA style.

11.Information Literacy / Integration of Sources
Weight: 5%

Serious errors in the integration of sources, such as intentional or accidental plagiarism, or failure to use in-text citations.

Sources are partially integrated using effective techniques of quoting, paraphrasing, and summarizing.

Sources are mostly integrated using effective techniques of quoting, paraphrasing, and summarizing.

Sources are consistently integrated using effective techniques of quoting, paraphrasing, and summarizing.

12.Clarity and Coherence of Writing
Weight: 5%

Information is confusing to the reader and fails to include reasons and evidence that logically support ideas.

Information is partially clear with minimal reasons and evidence that logically support ideas.

Information is mostly clear and generally supported with reasons and evidence that logically support ideas.

Information is provided in a clear, coherent, and consistent manner with reasons and evidence that logically support ideas.


 

Running head: DEMAND ESTIMATION 2

Introduction

Supply and demand is a model for understanding how prices and quantities are determined in a market system. To better understand this, two groups of people will be considered, consumers and sellers/producers. The supply and demand model is dependent on a high degree of competition between consumers and producers. Competition among consumers raises the price, while sellers compete with each other and thereby lowering the price. The equilibrium is a point where the demand and supply curves intersect each other. At this point, equilibrium price is often called the "market-clearing" price because both buyers and sellers are satisfied at this price. The supply and demand model applies most accurately when there is perfect competition. In reality, few markets are perfectly competitive. However, the supply and demand framework still provides a good approximation for what is happening much of the time. Elasticity is a measure of the responsiveness of one variable to changes in another variable; the  percentage change in one variable that arises due to a given percentage change in another variable.

1. Computation

If P= 500, PX=600, I=5,500, A=10,000, and M=5000, Then using the regression equation and pugging in the variables, QD= - 5200 – 

42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) =17,650

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