OPERATIONS DECISION 14
QD= – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
Inorder to obtain QD value, substitute the real values of the variables
QD= -5200 – 42(5) + 20(6) + 5.2(5500) + 0.2(10,000) + 0.25(5000)
=-5200 – 210 + 120 + 28,600 + 2000 + 1250
PriceElasticity = -42 * 5/26560
CrossElasticity = 20 * 6/26560
IncomeElasticity = 5.2 * 5500/26560
AdvertisementElasticity = 0.2 * 10,000/26560
OvenElasticity = 0.25 * 5,000/26560
QuantityDemanded = QD = -2,000 – 100P + 15A + 25PX + 10I
Inorder to obtain the value of QD, substitute the real values of thevariables. In this case, QD will be as follows
QD= -2,000 – 100 (2) + 15 (640) + 25 (3) + 10 (5,000)
=-2000 – 200 + 9600 + 75 + 50,000
PriceElasticity = -100 * 2/57475
AdvertisementElasticity = 15 * 640/57475
CrossElasticity = 25 * 3/57475
IncomeElasticity = 10 * 5,000/57475
Fromthe calculations of price elasticity in option 1 and option 2, itemerged that the elasticity was less than one in the case of option1, the elasticity was -0.008 while in option 2 the elasticity was–0.03. In case price is increased in both options, the revenuescollected will be low. This is because consumers are responsive toprice changes. Thus, in both options, revenues can only be increasedthrough lowering the price. As the price goes down the spending onthe decrease, making consumers spend more on the commodity since theydeem the prices to be affordable. However, this would only takeeffect in the long run. In the short run, a change in price may notbe easily felt. Thus, in the short run, consumers may change theirpurchasing behavior despite a price change.
Forcross elasticity, both options have positive cross elasticity. Thisis an indication that the commodities being considered in bothoptions are substitutes. However, the elasticity in both cases areless than one 0.005 for option 1and 0.001 for option 2. Thisindicates that the commodities are not good substitutes and the priceof the competitor would have little impact for the sales of thebusiness. Because the commodities are not perfect substitutes, achange in price both in the short and long run will not have a lot ofimpact.
Inthe case of Income elasticity, option 1 indicates a positive incomeelasticity that is more than one. This implies that the commodity isincome elastic and is a superior or luxury good. Thus, the commodityis responsive to changes in income both in the short and long run. Onthe other hand, in option 2, the income is positive but less than 1.This implies that, in option 2, the commodity is a necessity good(McEachern, 2012). Therefore, a change in price will not changequantity demanded in the short run however, in the long run, anincrease in price would trigger consumers to look for alternatives.
Iwould recommend that the business should not cut down its prices. Incase the business cuts its prices, then the revenues of the businesswill also fall. This is because from both options, the priceelasticity is less than one. This implies that it would be difficultfor the business to increase its sales in case it drops its prices.Also, the cross elasticity in both options is very close to zero.Therefore, it would not be advisable for the business to lower itsprices further in an attempt to increase its market share.
Option2 Demand Curve
EquilibriumPrice and Quantity
Qd= 26770 – 42P
Qs= -7909.89 + 79.1P
AtEquilibrium, Qd = Qs
26770– 42P = -7909.89 + 79.1P
Substitutingthe value of P Q = -7909.89 + 79.1(286.37)
57675– 100P = -7909.89 + 79.1P
Q= -7909.89 + 79.1(366.19)
Thedemand for the low calorie food may change due to factors such aschanges in consumer income, the price of a competing product, andchanges in tastes and preferences of consumers (McEachern, 2012). Ashort-term decrease in consumer income may not have a negative effecton the commodity, but the long-term decrease in consumer income mayadversely impact the demand of the commodity. Alternatively, thesupply for the low calorie food may change as a result of factorssuch as change in the number of suppliers of the commodity, changesin technology, change in the raw materials and labor (McEachern,2012). Short-term factors like change in supplier numbers and changesin labor and raw materials cannot adversely affect the supply of thecommodity however, long-term factors such as change in technologycan adversely affect the supply of the commodity because technologymay be expensive to adopt (Seliet, 2000).
Aleftward shift of the demand curve for the commodity can be as aresult of a decrease in the consumers’ income. Besides, in case theeconomy experience recession, the demand curve for the commodity mayalso be shifted to the left. A rightward shift in the demand curvefor the commodity may be as a result of an augment in consumer incomeand a decrease in price of substitutes. On the other hand, supplycurve for the commodity can be made to shift to the right byadvancement in technology. Alternatively, the supply curve wouldshift to the left in case the price of labor increases orunavailability of labor.
Inthe market of frozen foods, examples of two competitors includeHealthy Choice and Lean Cuisine. Lean Cuisine became established in1981and now has markets in Australia, Canada, and U.S. Thisorganization is owned by Nestle and provides different frozen foodsthis company is a leader in low calorie food and Healthy Choice is alarge competitor to Lean Cuisine. The market segment is usuallydetermined through three criteria that include psychographic,profile, and behavioral variables. Psychographic variables areapplied when buying behavior have a correlation with the personalityor lifestyle of a consumer. Behavioral variables are applied based onthe purchasing patterns and benefits sought from consuming theproduct. Profiling variables are used to categorize customers.
Factorswhich will have a vast impact on frozen food operations include laborand variable costs. Availability of labor in the new environment islikely to reduce the operating costs since labor cost will decrease.However, in case there is scarcity of labor in the new environment,the operations will be difficult since there will be an increase inoperating cost emanating from costly labor. On the other hand, lowvariable cost would imply a decrease in operating cost while highvariable cost would cause an increase in operating cost (McGuigan etal, 2014).
Inregard to the short term analysis, price is greater than the marginalcost in a monopolistic competition. This is an indication that thismay not produce profit in the short run. When new firms enter theindustry, an increase in supply is likely to occur that will resultin a drop in the equilibrium price. As a result of the decline,demand curving reflects this. In the long run, marginal cost andmarginal revenue are equal and profits are zero. In order to realizeprofits, price must be greater than the average total cost.
TC= 160,000,000 + 100Q + 0.0063212Q2
ATC= 160,000,000/Q + 100 + 0.0063212Q
160,000,000/Q+ 100 + 0.0063212Q = 100 + 0.0126424Q
Valueof ATC = 160,000,000/159,097 + 100 + 0.0063212 (159,097)
=1005.7 + 100 + 1005.7
Thecompany should discontinue its operations due to the incapacity ofcompeting with its competitors due to innovation or prices. Thecompany may close its operations if it feels it has inadequatefunding. In case of unavailability of supplies that the company maybe using to produce goods, it may end up discontinuing its operations(Liang, 2014). For the company to remain profitable and stay inbusiness, it needs to have sufficient knowledge concerning theproducts of the competitors and the prices offered. Another criticalaspect to ensure that the company stays in operation it should havemore than one supplier. Also, having adequate capital is of immenseimportance.
Apricing policy that I would suggest entails marginal cost pricing.During the setting of a price, it is important that the price set isequal to the extra cost of producing an additional unit of output. Intimes of poor sales, businesses usually set prices close to marginalcost. To make a business stay profitable, price has to be greaterthan the average total cost at the highest output level.
Q= 26770 – 42P
P= 637.4 – 0.024Q
TR= PQ = 637.4Q – 0.024Q2
MR= 637.4 – 0.048Q
Forprofit maximization, MR = MC
637.4– 0.048 Q = 100 + 0.0126424Q
OptimalQuantity = 537.4/0.0606424
P= 637.4 – 0.024Q
P= 637.4 – 0.024 (8861.8)
Theprice is lower than the ATC
Incase the company desires to continue in its monopolistic position, ithas to ensure that it invests in advertising. In the short run, thecompany may depend on advertising so as to sustain its profitability.
Surplus= TR – TVC
=637.4Q – 0.024Q2– 100Q + 0.0063212Q2
=537Q – 0.0176788 Q2
Themonopolistic company will maximize its profits in the long run whenits demand curve is tangent to the company’s average total costcurve.
TR= 637.4Q – 0.024Q2
TC= 160,000,000 + 100Q + 0.0063212Q2
II= TR – TC = 637.4Q – 0.024Q2– (160,000,000 + 100Q + 0.0063212Q2)
II= 537Q – 0.0303212Q2– 160,000,000
=537 (8861.8) – 0.0303212(78531500) – 160,000,000
=4758786.6 – 2381169.32 – 160,000,000
Inorder for the company to enhance its profitability, differentrecommendations can be put into consideration. The company canincrease its marketing increased marketing would keep the company onthe minds of the consumers when they desire to spend (Motta, 2007).The advertising should convince consumers why it is good than itscompetitors. Another recommendation entails being innovative. Thecompany should make changes to its products based on the consumerpreferences.
McEachern,W. A. (2012). Microeconomics:A contemporary introduction.Mason, OH: South-Western Cengage Learning.
McGuigan,J., Moyer, R. C., & Harris, F. (2014). ManagerialEconomics.New York: Cengage Learnng.
Motta,M. (2007). Competitionpolicy: Theory and practice.Cambridge: Cambridge Univ. Press.
Liang,M. (2014). Themicroeconomic growth.Heidelberg: Springer.
Seliet,H. (2000). Business:compulsory units.Oxford: Heinemann Educational.