1442 words - 6 pages

Strayer University

Assignment 2: Operations Decisions

Submitted by:

Name

ECO 550

Dr. Lundondo Mumeka

Date: 14 Aug 2014

Today, life has become very fast. In today’s fast living world, the value of time has increased a lot. Most of the people are working and hardly find any time to cook for themselves. In this busy schedule, the introduction of low calorie microwavable food has lives of people much more easier. These products are easily consumable and hence have become very popular.

As discussed in assignment 1, the market structure (or selling environment) was perfectly competitive. In a perfectly competitive market there are a large number of buyers and sellers. The products ...view middle of the document...

Now, in a monopolistic competitive environment, advertisement plays an important role. Here also, the sellers of the microwavable food incurs advertisement expenditure to promote their product.

In assignment 1, the market structure was perfectly competitive. Hence the equilibrium price and quantity were determined by the interaction of the demand and supply curve. But the profit maximizing condition for a monopolistic competitive firm is different from a perfectly competitive firm. For a monopolistically competitive firm,

Profit (p) = Total Revenue (TR) – Total Cost (TC)

= P×Q – TC

According to the FOC of profit maximization, we get

= - [Here P is not fixed]

= MR – MC = 0

Therefore MR = MC

In assignment 1, the demand function is estimated as:

Option 1:QD = - 5200 - 42P 20PX 5.2I .20A .25M.

Option 2: QD = - 20,000 - 100P 15A 25PX 10 I

Now, we will find the equilibrium price and quantity for both the cases.

Option 1:

Putting the values of the independent variables, we get,

Qd = 38,650 - 42P

Therefore, inverse demand function is:

P = 38650/42 – Qd/42

Therefore, Total Revenue (TR) = P×Q = 38650Q/42 – Qd2/42

Marginal revenue (MR) = 38650/42 – Qd/21

= 920.2380952 - 0.047619048Qd

The cost functions are given as:

TC = 160,000,000 100Q 0.0063212Q2

VC = 100Q 0.0063212Q2

MC= 100 0.0126424Q

Now, a monopolistically competitive firm equates its MR with MC, i.e. at profit maximizing output, MR = MC holds.

Therefore,

920.2380952 - 0.047619048Q = 100 0.0126424Q

Or, 0.174043Q = 820.2381

Therefore, Q* = 4712.846 ˜ 4713

And P* = 808.0274742 ˜ 808

Option 2:

Putting the values of the independent variables, we get,

Qd = 31410 – 10P

Therefore, inverse demand function is:

P = 3141 – 0.1Qd

Therefore, Total Revenue (TR) = P×Q = 3141Q – 0.1Qd2

Marginal revenue (MR) = 3141 – 0.2Qd

The cost functions are given as:

TC = 160,000,000 100Q 0.0063212Q2

VC = 100Q 0.0063212Q2

MC= 100 0.0126424Q

Now, a monopolistically competitive firm equates its MR with MC, i.e. at profit maximizing output, MR = MC holds.

Therefore,

3141 – 0.2Q = 100 0.0126424Q

Or, 0.326424Q = 3041

Therefore, Q* = 9316.104208 ˜ 9316

And P* = 2209.389579 ˜ 2209

Thus, we can see that the equilibrium quantity is much lower than the value found in assignment while the equilibrium price calculated is much higher. Therefore, if the market structure becomes monopolistically competitive, then the equilibrium price will increase and the equilibrium output will fall.

From the cost structure we can see that the industry has a huge fixed cost. This implies that in the short run, it will be difficult for the firms to earn pure economic profit. If we calculate the profit, we can see that in both the cases, the firms incur losses in the short run.

Like perfect competition, a monopolistic firm can earn normal profit, super normal profit or even can incur losses in the short run. But in the long run it only earns normal profit. Suppose that a monopolistic competitive firm...

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