Managerial Economics
INTRUCTIONS ASSIGNMENT 2
a. Assume that your inverse demand equation from Assignment 1 is written as:
P = 560 – 0.024Q. Then, the marginal revenue (MR) equation for this demand equation will
become: MR = 560 – 0.048Q. Also assume that the price (P) that found in Assignment 1
was = $3.66 (or 366 cents). .
b. The correct algebraic forms of the cost functions to be used are as follows:
TC = 160 + 10 Q + 0.0063Q2.
VC = 10Q + 0.0063Q2.
MC = 10 + 0.0126Q.
c. Proceed with answering all questions of Assignment 2 as instructed below. Make sure to use
the MR = MC rule to find the firm’s profit-maximizing price and output level. Compare the
profit-maximizing price that you find with the above-mentioned $3.66 for answering the
related question.
Write a six to eight (6-8) page paper to address the following questions:
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 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+ 10Q + 0.0063Q2
VC = 10Q + 0.0063Q2
MC= 10+ 0.0126Q
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:
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.
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