Assignment 2 Paper and Details

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Assignment 2 Paper and Details

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 + 0.0063212Q2

VC = 100Q + 0.0063212Q2

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 – 0.0238Q2
    • 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:

  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

  1. 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.)
  2. 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.)

  1. 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.)

  1. 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.
  2. 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.

Click here
to view the grading rubric.

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