Operations Decision

Operations Decision
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:

1    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.
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 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
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, 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.)
6    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.)
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.
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.
The specific course learning outcomes associated with this assignment are:
•    Analyze short-run and long-run production and cost functions.
•    Apply macroeconomic concepts to changes in global and national economies and how they affect economic growth, inflation, interest rates, and wage rates.
•    Evaluate the profit-maximizing price and output level for given operating costs for monopolies and firms in competitive industries.
•    Use technology and information resources to research issues in managerial economics and globalization.
•    Write clearly and concisely about managerial economics and globalization using proper writing mechanics.

Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Option 1. Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets.
QD = – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55    n = 26   F = 4.88
Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:
QD = Quantity demanded of 3-pack units
P (in cents) = Price of the product = 500
PX (in cents) = Price of leading competitor’s product = 600
I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which supermarkets are located = 5,500
A (in dollars) = Monthly advertising expenditures = 10,000
M = Number of microwave ovens sold in the SMSA = 5,000

1.    Compute the elasticities for each independent variable. Note: Write down all of your calculations.
Using the regression equation and the values of the independent variables P = 500, PX = 600, I = 5500, A = 10000 and M = 5000, we can calculate the quantity demanded:
QD = – 5200 – 42*500 + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650
Price elasticity of demand can be calculated as:
EP = (P/Q)*(dQ/dP), with dQ/dP (the partial derivative of Q with respect to P) = -42 (from the regression equation)
As a result, price elasticity EP= (500 / 17650)*(-42) = -1.19
Using the same formula for other variables, cross price elasticity of demand (EPX), income elasticity of demand (EI), advertisement elasticity (EA) and microwave oven elasticity (EM) can be calculated as:
EPX= (600 / 17650)*20 = 0.68
EI= (5500 / 17650)*5.2 = 1.62
EA= (10000 / 17650)*0.2 = 0.11
EM = (5000 / 17650)*0.25 = 0.07
2.    Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
Price elasticity
The value of price elasticity equal to -1.19 implies that with every 1% of increase in price of the widget the quantity demanded will fall by 1.19%. It can be stated that the demand is “relatively elastic” since the value of price elasticity is slightly greater than 1 (ǀEPǀ˃1), which, in other words, means that the demand is relatively responsive to price changes. As a result, increase in price of the widget will discourage significant number of customers from buying the same amount of microwavable food from the company and is expected to result in lower total revenue for the company, as, on the other hand, decrease in price is expected to raise the total revenue since it will attract customers to buy more of the company’s goods.
Cross price elasticity
Cross price elasticity (elasticity of the price of leading competitor’s product) is equal to 0.68 that can be interpreted as the percentage increase in demand of microwavable goods of the company with the increase of price of leading competitor’s product, which means that 1% of increase in price of competitor’s goods will affect the demand for the company’s goods by 0.68% increase, and the other way around. Since 0˂EPX˂1, it indicates that the demand of the product is “relatively inelastic” to a competitor’s price and the company’s revenue won’t be affected by changes in it, thus shouldn’t be considered when establishing company’s strategy.
Income elasticity
Income elasticity of 1.62 implies that an increase in customers’ income by 1% will result in increase in demand for the product by 1.62%, and other way around. Since EI˃1, the demand is “relatively elastic” to income and its increase will result in the increase of quantity of microwavable food demanded and, as a result, to the increase of revenue of the company, while the decrease in income is expected to significantly decrease the quantity demanded. Therefore, the company’s strategy must include the increase in prices when the income increases. We can also conclude that the product is a luxury good which is indicated by the value of income elasticity greater than 1 and, as a result, the high responsiveness of a demand to changes in customers’ income.
Advertisement elasticity
Advertisement elasticity equal to 0.11 means that the increase in expenses on advertisement by 1% will lead to the sales rise by 0.11%. Therefore, the demand for the product is inelastic to the advertisement expenditure. It means that the revenue won’t be increased by a greater expenditure on advertising, on the contrary, the increase in advertisement expenses may affect the price level and, as a result, drive lots of customers away who are more sensitive to price changes.
Microwave oven elasticity
The elasticity of microwave oven quantity is 0.07 which means that the increase in quantity of microwave ovens sold by microwave oven selling companies increases the demand for the widgets by 0.07% which is an indicator of inelasticity of the demand towards microwave ovens sales. In other words, the demand is highly inelastic and there is no significant effect of low/high sales of microwave ovens on the company’s revenue. Thus, the pricing strategy can ignore this aspect.
It can be concluded that the demand for quantity of microwavable goods produced by the company is relatively elastic and sensitive to both its price and customers’ income while it is relatively inelastic and insensitive to competitor’s prices and highly insensitive to advertisement expenditures and the quantity of sold microwave ovens.
3.    Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
Based on the current price elasticity, the change in price of the product affects quantity demanded by customers, therefore the company must consider cutting the price since it does attract more clients and, in case of elastic demand, the company’s total revenue increases and the raised demand and, consequently, gains from it compensate the losses caused by price lowering and losses in revenue related to that. As a result, the company is expected to increase its market share and generated revenue.
4.    Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 dollars.
A.    Plot the demand curve for the firm.
Since all the factors remain constant, the demand equation with the dependent variable P will be presented as:
Q = -5200 – 42*P + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000
Q = 38650 – 42P
P = 38650/42 – Q/42    (plotted below)
B.    Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices.
Q = 5200 + 45P
P = -5200/45 + Q/45

C.    Determine the equilibrium price and quantity.
In order to determine the equilibrium price and quantity, we equate both demand and supply functions:
38650 – 42P = 5200 + 45P
87P = 33450
P = 384.48 (the equilibrium price)
and Q = 5200 + 45*384.48 = 22501 (the equilibrium quantity).
As a result, the equilibrium price is 384.48 cents and the equilibrium quantity is 22501 units.  The equilibrium price and the quantity can also be found on the graph at the point where the supply and demand curves meet.
D.    Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product.
Factors affecting the demand for a particular good may include but are not limited to the product pricing; competitors’ presence; income and number of consumers and their habits and preferences; consumers’ expectations about the future of the market and others. In our case, as it was demonstrated in the demand equation, the demand for the company’s product is sensitive to its price and level of income of the consumers while it is insensitive to the changes in competitors’ prices, advertisement promotion and quantity of sold microwave ovens. Likewise the demand, factors influencing supply include product’s price (due to a greater incentive for manufacturers to get more gain), price level of competitors’ goods and substituted, number of producers and also future expectations of the customers. Among some other factors that can cause short-term changes in the product’s supply are the availability of resources needed for its production and possible breach in production process caused by the slow work of the employers due to the shortage of people hired, as an example. Among factors of long-term demand and supply changes can be development of technology sector, changes of customers’ preferences and others.
5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.
Rightward shift of the demand curve can be caused by increase in consumers’ income, lowered price of complementary products (in our case – microwave ovens) along with positive change in people’s preferences and attitude towards the product or high expectations for the future. On the other hand, leftward shift in the demand curve can be caused by decrease in customers’ income, raised prices for complementary goods as well as change in customers’ preferences and taste.
Some factors influencing and contributing to the rightward shift in the supply curve can be low cost of labor, changes in input prices (which refers the goods used in a production process), high level of raw materials supply, as well as advanced development of technologies, government taxation reduction and many others. Leftward shift in the supply curve can be attributed to lower availability of raw materials and labor force, increased taxation, higher level of salaries and so on.
REFERENCES

Farnham, P. G. (2014). Economics for managers.(3rd ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Mukherjee, S., Mukherjee, M., & Ghose, A. (2003).Microeconomics. New Delhi: Prentice-Hall of India.
Evans, A. (2014). Markets for man

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