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**Assignment
2**

**Instructions**

**From Assignment 1**, you will use the following information:

Qs = -7909.89 + 79.1P

Qd = 38650 – 42P

P = 384.48 cents and Q = 22,502

units

You should also use the following **rules
for profit maximization**:

P = MR = MC in perfect competition

MR = MC in imperfect

competition

Client Guide

**Question 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. The

market structure in the first assignment was competitive. This means that the

firm does not have control over the price and it has to charge the equilibrium

price. 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.

**Since
the company has control over the price, it has to decide how much to charge and
how much to produce to maximize profit. **

**The**

profit-maximizing/loss-minimizing quantity and price can be determined by

setting the MR = MC. This involves the following.**Find**

the total revenue: TR = P x Q**Find**

the marginal revenue by calculating the derivative of the total revenue

function.**Set**

MR equal to the provided MC function and solve for Q, and then for P.

**Based**

on the results, the company should make a decision to continue producing

or shut down.

**Question 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.

**Consider the change in the degree of**

competition.**Review**

the sections “Industry Performance” and “Competitive Landscape” in the

IBISWorld report provided.**Factors**

that might have caused change could be for example consolidation of the

industry, i.e., firms become bigger and have now some control on the

price. Also, firms can differentiate their product from the products

of their competitors, which again results in more control over the

price. Firms’ actions are interdependent and now their decisions are

affected not just by the demand and supply conditions, but by what moves

their major competitors make. These are just examples. You

might come up with other factors.

**Question 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 short and the long-run.

**TC = 160,000,000 + 100Q + 0.0063212Q**^{2}

**VC = 100Q + 0.0063212Q**^{2}

**MC= 100 + 0.0126424Q**

**To
maximize profit, the firm has to find ways to maximize its total revenue and
minimize its cost. You should also consider the difference between short and
long run. In the short run, at least one of the costs is fixed. In
the long run, all costs can be changes, i.e., all costs are variable. A review
of the IBISWorld Industry Report on the frozen food production in the US can
also help you answer this question. The cost functions affect the profit. The
cost functions are to be used to answer question 4 as well. **

**Using**

the provided cost data for the firm, determine whether the firm is making

a profit or a loss by charging the equilibrium price determined in

Assignment 1.**Calculate**

the total revenue.**Calculate**

the total cost.**Find**

the difference between TR and TC, which is the profit or the loss.**Review**

the section “Cost Structure Benchmarks” (p. 22) in the IBISWorld report.

**Question 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.)*

**Here,
you have to find the profit maximizing or loss-minimizing quantity and price.
Then, determine whether the company is making a profit. To find the value of Q
and P, you should use the marginal rule MR = MC. **

**MC**

function is given.**You**

should calculate MR by using the demand function from Assignment 1: Qd =

38,650 – 42P.**First,**

inverse the demand function to show the price in terms of quantity:

P = 920.238 – 0.0238Q.**Then,**

find the TR function, which is equal to price times quantity TR = (920.24

– 0.0238Q)*Q = 920.24Q – 0.0238Q^{2}.**Finally,**

find MR which is the derivative of TR with respect to quantity, i.e., MR

= 920.238 – 0.0476Q.

**Next,**

set MR equal to the MC given in the second assignment and solve for the

profit maximizing or loss minimizing Q and P.**When**

you find the values of Q and P, you can plug in the number for Q into the

TR function to find the TR and in the TC function, to find the TC.**Then**

subtract TC from TR to find the total profit.**If**

you get a negative number, the firm is making a loss.**If**

the number is positive, the firm is making a profit.

**If the**

firm is making a loss, you should figure out whether the firm should

continue to produce at a loss in the short run, or shut**To**

answer this question, you should compare the TR with VC, or price with

AVC. If the firm is making a loss and the TR is higher than VC or

the price is higher than the AVC, then it would be better off producing

rather than shutting down because it will be able to cover some of its

fixed cost. But if TR is smaller than VC, or if price is smaller than

AVC, the firm will be better of shutting down.

**Question 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.)

**Use
the profit-maximizing rule MC = MR to find the price and quantity that maximize
profit.**

**Question 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.)

**You
can also review the section “Key Statistics” on p. 38 of the IBISWorld Industry
Report Report.**

**Question 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.

**Review the sections “Industry Performance” and “Products and
Markets”**

** Additional Information**

Write a six to eight (6-8) page

paper in which you:

- Outline a plan that will assess the effectiveness of

the market structure for the companyâ€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

â€œoptimalâ€ 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 = 160,000,000 + 100Q +
0.0063212Q2**

**VC = 100Q + 0.0063212Q2**

**MC= 100 + 0.0126424Q**

- 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 firmâ€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:

*In Assignment 1, you determined your
firmâ€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 firmâ€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.)

- 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.

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 studentâ€s name, the professorâ€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.

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to view the grading rubric.

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