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.
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 Qs = Qd. You calculated the various elasticities using the estimated demand at its current price of 500 cents.
Since the firm faces a downward sloping demand curve it has pricing power. You should determine 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.
Use the IBIS Report for the Frozen Food Production Industry (SIC Code 31141) provided by your instructor.
Write a six to eight (6-8) page paper in which you:
1. Outline a plan that will assess the impact of the market structure/cost data based on the activity in the first assignment for the company’s operations. Use a supply curve of the following form to reexamine your conclusions from the first assignment: Qs = -7909.89 +79.0989P [OR MC = 100 + 0.01264Q]. This new supply curve gives you the same equilibrium price and quantity as before, but is based on the firm’s marginal cost curve.
Further assume that the estimate of the firm’s AVC = 100 + 0.009Q and that VC/TC =0.71 always [implying that FC/TC = 0.289]. These are the industry average estimates from the IBIS report for this industry.
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.
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.
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.
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.
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.
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
Assignment 1 Answers
Due Week 3 and worth 200 points
The maker of a leading brand of low-calorie microwavable food estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Q = – 5200 – 42P + 20PX + 5.2I + .20A + .25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
Assume the following values for the independent variables:
Q = Quantity sold per month
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 the supermarkets are located = 5,500
A (in dollars) = Monthly advertising expenditures = 10,000
M = Number of microwave ovens sold in the SMSA in which the
supermarkets are located = 5,000
Using this information, answer the following questions:
1. Compute elasticities for each variable.
Q = – 5200 – 42P + 20PX + 5.2I + .20A + .25M
= – 5200 – 42(500) + 20(600) + 5.2(5500) + .20(10,000) + .25(5000)
= – 5200 – 21000 + 12000 + 28,600 + 2000 + 1250
Q = 17,650
a. EP = – 42 * 500 = -1.18
EX = 20 * 600 = .68
EI = 5.2 * 5,500 = 1.62
EA = .20 * 10,000 = .113
EM = .25 * 5,000 = .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.
The demand is slightly price elastic (the elasticity coefficient is bigger than the absolute value of 1). This means that consumers are responsive to price changes. Therefore, if the firm wants to increase its revenue, it should lower its price.
Cross elasticity is positive, implying that the products are substitutes, but it is less than 1, suggesting that they are not particularly good substitutes and the competitor’s price has little impact on the firm’s sales.
The product is income elastic. The income elasticity coefficient is bigger than 1. This implies that the product the firm produces is a superior good (a luxury good) and is reponsive to income fluctuations. This firm should be very concerned if the economy slows down because disposable income decreases.
Advertising elasticity is smaller than 1. The product is inelastic with respect to advertising; a 1 % increase in advertising expense will lead to a 0.113 % increase in sales. Thus, advertising does not have a significant effect on sales.
The elasticity coefficient of .07 suggests that a 1 % change in the price of microwave ovens will change the sales of the firm by only 0.07 %.
3. Do you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.
Answer: This firm might want to cut its price to increase its sales because the product is price elastic (although only barely). However, if its leading competitor retaliates, the firm must expect to be affect substantially because its cross price elasticity is relatively high.
4. Assume that all the factors affecting demand in this model remain the same, but 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.
b. Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices.
c. Determine the equilibrium price and quantity.
Answer: Please refer to the Excel file for the supply and demand graph.
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 long-term changes in the market conditions could impact the demand and the supply of the product.
Consider factors affecting the demand such as price of related goods (substitutes and complements), consumer tastes and preferences, advertising, number of consumers, expectations of future prices, etc.
Consider factors affecting the supply such as price of inputs, technology, number of suppliers, expectation of future prices, taxes or subsidies, etc.
Answer:The demand for a low calorie food can change for a number of reasons: consumer income changes, the price of the competitor’s product, change in consumer preference for low calorie foods. The supply can be determined or changed by the number of suppliers for the product, and also technology changes and labor and raw materials which will affect the cost of production.
5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curve.
Answer: A rightward shift of demand curve could be the cause of an increase in consumer income. If there were a decrease in the price of substitute products such as the microwave oven there will also be an increase in preference for low calorie foods. If there is a leftward shift of the demand curve consumer’s income may have decreased or we may be simply in a recession.
A rightward shift of supply curve can be caused by things such as technology advances. An example would be how the food is processed. A leftward shift can be caused by a decrease in availability and increase in price of labor.
The IBISWorld Industry report for the Frozen Food Production Industry [SIC Code 31141] should answer a lot of your questions about the low calorie microwave food firm in the assignment. The other two IBIS PDFs give you general information about the industries researched by IBISWorld.
IBISWorld is one of the world’s leading publishers of business intelligence, specializing in Industry research and Procurement research.
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