ECO 550 – Winter 2017
Use the updated demand (QD) and marginal revenue (MR) functions below to complete this assignment.
Due to changes in the low calorie, frozen, microwavable industry’s market structure, the firm-specific demand equation for our hypothetical company has pivoted and shifted outward to the right. It is now estimated to be:
QD= 350,000 – 100 P
This function generates the following Marginal Revenue Function (MR):
MR = 3500-0.02Q
Write a six to eight (6-8) page paper in which you:
1. Outline a plan that allows you to identify the new market structure of this firm (monopolistic competition, oligopoly, monopoly, or perfect competition). Comment on at least two leading competitors in this industry, taking note of their pricing strategies, profitability, and/or relationships within the industry and worldwide.
Note: In Assignment 1, the assumption was that the market structure was perfectly competitive. Changes in the market now suggest that this firm has substantially more market power to set its own “optimal” price.
2. Given that the market structure has changed from the original scenario in Assignment 1, determine at least two (2) likely factors that may account for this change.
3. Analyze the major short run cost functions for this firm assuming they are represented by the equations below (where TC is total cost, VC is variable cost, MC is marginal cost, and Q is quantity). How can this information be used to make production decisions in the short-run and possibly the long run.
- TC = 160,000,000 + 100Q + 0.00632Q2
- VC = 100Q + 0.00632Q2
- MC= 100 + 0.0126Q
Hints: What is the equation for average total costs? What is the output level and dollar value associated with minimum average total cost. Why is this useful?
4. Under what circumstances should this firm discontinue operations in the short run (?) and in the long run? Explain.
5. Determine the firm’s profit maximizing price and output level using the golden rule: MR = MC, and/or suggest an alternative pricing policy that will enable the firm to maximize profits. Provide the rationale for your suggestion.
6. Outline a plan, or use your results above, to evaluate this firm’s financial performance. Consider all the key drivers of performance, such as total revenue, total cost, total profit, etc. Assuming production is already at its optimal long run scale, is the firm earning positive or negative profits in the short run? Is this profitability likely to change in the long run?
- Hint: To calculate profit in the short run, use the cost, price, and output levels you generated in part 5.
- Hint: Profit in the long run will be driven down or up to zero if there are no significant market barriers to entry or exit.
7. Recommend and justify two (2) actions the firm could take to improve its profitability over the long run.
8. References: Use at least five (5) quality academic resources in this assignment. All references must be cited in the text.
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
- 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.
To view Assignment 2 Grading Rubric, click HERE.