Operation Decision in Economics

Question 1

In the fast-paced world, the demand for healthy frozen microwavable food is on the rise. The reason for it to be on high demand is due to the busy professional life of the different individuals. Moreover, microwaveable food requires lesser cooking time and it helps in providing flavors of gourmet food right from home. Frozen and low calorie specific food options are a great choice for the whole family ranging from children to professionals. It is gradually turning out to be a staple food for all households. There is a huge variety of frozen microwaveable products, however it has been seen that consumers prefer those that are healthy and contain good source nutrients and less calories. The two leading competitors in the market of frozen food consumables are Lean Cuisine and Healthy Choice.  Lean Cuisine was established in the year 1981 by Nestle. The product is now available in Australia, Canada and the US.  Con Agra manufactured Healthy Choice in the year 1989, which was quite popular during the 90s. The products are still preferred by almost all age groups. The companies tend to divide the market into three basic criteria considering their preferences i.e. behavior, profile and psychographic. The concept of profiling is not deeply relevant yet profile variables like economic status or the geographical location can help in identifying the target market. The behavior variable are based on the customer’s behavior in relation to the product (Mankiw, 2014). . Some of the features of it include the readiness to buy, usage rate and brand loyalty.  The psychographic segmentation of the customers is based on the lifestyles like interest, opinion and activities.  

Product substitution analysis can be used for determining if the customers prefer different brands in different occasion. The companies by comprehending the customer preferences and the market trends will be able to know the type of products that need to be produced. In order to test the market effectiveness, the companies can use mail-in response cards, social media, online form submission and market survey.  

Question 2

The market structure for the low calorie frozen food is no longer perfectly competitive rather has changed into imperfectly competitive market. The reason for the change is due to change in consumer taste and their income. Both income and taste tend to be closely related to the needs and the demand of the market. It has been observed that with the rise in the income, consumers tend to purchase more of the products they already consume or purchase expensive ones (Freixas & Rochet, 2008). The ability of consumers to purchase depends on the level of income. A low level of income restricts consumers to purchase product in large volume. The products that satisfy the demand of the consumers have the ability in drawing demand irrespective of the price tag. The companies can control taste and preferences of the consumers but it is not possible to have a control over their income (Baumol & Blinder, 2015). The companies should strive for developing products that meet the needs of the customers. Apart from preferences, the pricing strategy also plays a considerable role in attracting consumers and is a great way of ensuring quality to the customers.   

Question 3

In the short run, under monopolistically competitive market, the price is greater than the marginal cost so this allows the firms to generate profit in the short run. With the new competitors entering in the market, the supply of the products is going to increase. However, it will cause price of the products to reduce. In this form of market, there is free entry and exit of the firms so the prices tend to oscillate.  The long run situation is comparatively different to that of the short run. In the long run, the marginal cost is always equal to the marginal revenue. This implies that firms earn economic profit in the long run. In such a scenario, the consumers tend to look for substitutes. The profit for the organization is realized when the price is higher than the average cost. The products manufactured by the company should be able to meet the average variable cost specifically in the short run for continuing its operation. 

The following is the mathematical interpretation

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Total Cost: TC = 160,000,000+100(Q) +0.0063212Q2

VC= 100(Q) + 0.0063212Q2

MC= 100 + 0.0126424Q

To determine the cost functions for the long run and the short run, the average cost needs to be calculated 

AC= TC/Q

AC= 160 000,000/Q + 100Q/Q + 0.0063212Q2/Q

       = 160 000,000/Q + 100 +0.0063212Q.

 AVC = TVC /Q= 100 +0.0063212Q

 In order to solve for Q, the AC should be equal to MC

160 000,000/Q + 100 +0.0063212Q = 100 + 0.0126424Q

• 0.0126424Q2 = 160 000,000+0.0063212Q2
• 0.0063212Q2 = 160 000,000
• Q2= 160 000,000/ 0.0063212
• Q2 = 25311649686.76
• Q= 159096

The number of units of output that needs to be produced is 159096 units so that the average cost can be minimized. This level of quantity is going to help in reaching the break-even point. The company can use the above information to see whether the company is doing well in the long run and the short run to stay afloat in the market. 

During both short run and long run, the company can be using the cost information to set the price of the product and develop strategies for benefiting the organization. 

Question 4

The short run and the long run cost function is going to help a company in deciding the amount of profit or was it a situation to pull out. The average cost function is going to help in deciding the point at which the breakeven point is going to be reached (Pindyck & Rubinfeld, 2015). In the breakeven point the firm is going to shut down the production. The breakeven point can be calculated by using the value of Q in the AC equation. After using, the value of Q calculated in Question 4. The average cost computed is 160 000,000/159096 + 100 +0.0063212* 159096 = 2111.35. The value is determined in cents so it can be said that the value would not be lower than 21.11 dollars for reaching the break even. If the price is lower than 21.11 dollar, then it can be said that the company was not able to cover their fixed cost. In the short run, company needs to be open if it considers on reducing the cost in the future (Rader, 2014) . If the company reaches a point where profit is equal to negative fixed cost then it will shut down its operation.  The use of the profit equation is going to help in determining their shut down point

Profit = Total revenue (TR) – Total Cost (TC)

The point of shut down is as follows:

π = (P*Q) – TFC- (AVC * Q).

 The crucial step that the management should be taking up in order to deal the situation must be recalculating the breakeven point. The company on understanding their need to stay in the market will be ensuring that it never reaches the shutdown point. There are a few products, which the management needs to provide at full price so that enough money is available for covering the fixed and variable cost (Bowles, 2009). .  

Question 5

 The company to maximize the profit, the company should be using the profit maximizing strategy, where MR=MC. This will help in determining the best output. The demand function of the firm is as follows:

QD= -2000-100P+15A+25PX+10I

 Q= -2000-100P+ 15*640+25*3+ 10*5000

• Q= -100P+57675
• 100P= 57675-Q
• P= 576.75- 0.01Q (Inverse demand function)

TR= P*Q- TC

• TR= 576.75Q- 0.01Q2

MR= 576.75- 0.02Q

 Profit Maximizing condition is MR=MC

• 576.75- 0.02Q = 100 + 0.0126424Q
• 476.750 = 0.0326424Q
• Q= 14605.234

Price (P) = 576.75- 0.01Q = 576.75- 146.05 = 430.7 dollars

The price and quantity is higher than the previous assignment. 

 The low calories market for frozen food is inelastic as with the rise in price there would be a fall in the demand. 

Question 6

High profit is going to be generated by the firm at 430.7 dollars and producing 14605.234 units of output. With the existence market power, the price and quantity combination is going to help in placing the company at the elastic portion of the demand curve.  The following mathematical derivations is going to help in calculating the financial performance at the 14605.234 units of output

AC = 160 000,000/Q + 100 +0.0063212Q.

Putting Q = 14605.234

 AC= 1095.5+100+92.32

• AC= 1287.82 dollars

The company produces the product at 1287.82 dollars and sells at 430.7 dollars

Profit = TR-TC

Profit= (430.7*14605.234) – (14605.234*1287.82)

• Profit= 6290474.28 – 18808907.29
• Profit = -12518433.01.

The firm is seen to incur negative profit in the short run 

 Long run situation: 

AC = 160 000,000/Q + 100 +0.0063212Q.

TC = 160,000,000+100(Q) +0.0063212Q2

Output = 14605.234

Profit = 430.7*14605.234- (160,000,000+100(Q) +0.0063212Q2)

• Profit = 6290472.56- (160000000+1460523+1348392.51)
• Profit = -156518443

Question 7

The company to improve the profitability there are two ideal ways:

Increase of marketing products: Companies should consider in increasing the marketing expenses. This is going to help in ensuring that the product reaches the right customers. The use of advertising is going to help companies to be different from the competitors and is going to help them in staying ahead. Even during the tough times, company should spend considerable amount in case of marketing. This is going to help a business to get customers over the year. 

Innovative products: The products that the producer manufactures must be unique and innovative so that is help the firm to stay ahead of the competitors. The company can do this by adapting to the changes by taking into consideration the preferences of the customers. The key should to be understand the  consumer’s mind and provide innovative quality products at competitive price.         

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