Assignment 2: Operation Decisions

Tambra Boone
ECO 550
Dr. Mohammad Sumadi

August 14, 2016

1. Market Structure for Companys Operations

In the current era there exists a huge demand for microwavable food options. A variety of
options are available in the form of competitive brands in the market to fulfill the demand. The
satisfaction of dietary needs based on the busy lifestyles of people today versus people of the
past differs greatly based on the advancement in technology. People have less time to eat meals
prepared and sit at a table as traditional meals occurred. The advancements in technology require
faster ways to satisfy hunger. The microwavable meal satisfies this demand. In the current era
consumers are more knowledgeable, more techno-oriented, and more competitive and have
higher income level than before. These factors are helpful in making their lives easier than
before. In addition to time, consumers of today are concerned with lower calories. A low-calorie
food is helpful in reducing weight about 3 to five pounds a week. Consumers are more concerned
with weight loss as a result of increases in people having diseases like diabetes, high blood
pressure, and high cholesterol. Due to these benefits many companies are offering low calorie
food. The companies offering low calorie food includes Lean Cuisine and Healthy Choice.
Lean cuisine was developed in 1981 by Nestle as a healthy alternative to Stouffer's frozen
dinners. At the time, there was an increase in the desire for weight management products. So,
since its development, the Lean Cuisine brand has become the trusted partner of consumers who
prefer healthy balanced meals (Nestle, 2015). Healthy Choice was developed in 1985 when
former CEO Mike Harper suffered a heart attack, which forced him to change his diet (Healthy
Choice, 2015). While seeking healthier alternatives, this led him to develop a brand of frozen
healthy foods that would make it easier for people to develop a healthier lifestyle (Healthy
Choice, 2015).

2. Causes for Change

There are four basic types of market structure. They are, perfect competition, which
occurs when there are many buyers and sellers, but none are able to influence price. There is
also oligopoly, which occurs when there are several large sellers who have control over the
prices (Tilson & Zheng, 2014). The third market structure is a monopoly, and that occurs when
there is one single seller, and the seller has considerable control over supply and prices (Tilson
& Zheng, 2014). Lastly, there is monopsony, and a monopsony occurs when there is one single
buyer with considerable control over demand and prices (Tilson & Zheng, 2014).
Both competition and oligopoly can effect change in a market structure. If there is a new
competitor, for example, firms may have to change their market structure. The firm may have to
change its image in order to retain their old consumers and gain new ones. Firms may have to
reevaluate its methods of operations as well (Joseph, 2015).
Companies lie in one of the following four market structures: monopoly, oligopoly,
monopolistic competition or perfect competition. Perfect competition is an industry where there
are large number of homogenous buyers and sellers of the specific product (Tilson & Zheng,
2014).

All competitors are price takers and do not affect the price of the product. In such a

market, advertisement does not play a role in creating or increasing demand. This shows that the
company cant use fancy marketing to overcompensate or deceive the customer in perfect
competition. The tools of deception are not successful in monopolies as well. According to
Tilson and Zheng (2014), in a monopoly there is only one supplier while the scenario shows that
there exists competition in this industry. In addition, advertisement does not impact demand in a
monopoly. Additional characteristics of monopolies are no direct or close substitute that can
impact the demand of a product, cross price elasticity of less than 0.35. When cross price

elasticity is near .35, an impact on demand exists. When this occurs , the firm lies under
monopolistic competition or oligopoly. Advertisement plays a vital role on demand function in
monopolistic competition. Moreover in monopolistic competition there exist many suppliers that
to some extent differentiate their products. The case also shows that there exist many firms in
this industry that differentiate itself from the other. Firms are unable to be an oligopoly because
oligopoly advertisement doesnt play a vital role in changing the demand of a product. Therefore,
the firm is deemed as a monopolistically competition industry structure.
In short run, a firm that is functioning under a monopolistic form of competition can earn
supernormal profit, operate at breakeven or can suffer from loss. If a firm is earning supernormal
profits, then by seeing that new entrants can come into that industry with a differentiated product
or offering same product at low cost.

This can cause the demand curve to shift as in

monopolistic competition. A firm is usually a price taker or can change price to little extent.
Therefore, the demand curve can shift to left. Whereas, if a firm is initially operating at loss,
then some firms may exit the business as entry and exit barriers are low in this structure. In
addition, the demand curve can shift to the right. In long run,

a firm that is operating

monopolistically can earn only normal profit. Both the scenarios are shown in the figure below.
In this industry structure, the firms usually charge prices that are higher than the marginal cost.
In this scenario they are offering the differentiated products. They can differentiate their products
by either adding or modifying a feature, packaging style, marketing strategy, unique and reliable
distribution channels, and/or adding a new flavor. The next step would be for them to invest a
portion of their marketing budgets in advertising their goods to create awareness among
customers and to remind the customers about their existence. Unlike perfect competition, they
are not the exact price takers but they can modify the price to some extent due to the

differentiation in their products, in return gaining market power. The greater the degree of
product differentiation, the greater the market power. Therefore, it is advisable for the
organization to perform active product differentiation strategies to maximize its profits.
3. Short Run and Long Run Costs Functions
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
Firstly, let's calculate in order to find the level of output that minimizes the average total cost
(ATC)
ATC= 160,000,000/Q + 100Q/Q + 0.0063212Q2/Q = 160,000,000/Q + 100 + 0.0063212Q.
Next we have to determine the average variable cost (AVC) which is found using the equation:
AVC= TVC/Q= 100Q/Q +0.0063212Q^2= 100 + 0.0063212Q.
ATC=MC
160,000,000/Q+ 100 + 0.0063212Q = 100 + 0.0126424Q
Then you subtract 100 from both sides:
160,000,000/Q +0.0063212Q = 0.0126424Q
Next, subtract 0.0063212Q from both sides
160,000,000 = 0.0063212Q^2 =
25,311,649,686.786 = Q^2 =

=159,096.353
The above value is the output. The value of 159,096.353 is a representation of the level
of the firm's output, which averages the total cost. If the level of production level continues at
159,096.353, the firm would be showcasing that they are producing at their ATC. These results
should allow the firm to decide whether they should continue to remain in business whether it is
in the short-run and long-run.
To complete this determination, the firm has to figure how much it will cost to produce
the ATC:
ATC = (160,000,000/Q) + 100 + 0.0063212Q
= (160,000,000/159,096.35) + 100 + 0.0063212(159,096.35)
= 1,005.68 + 100 + 1,005.68

= 2,111.36 = $21.11
If the firm's price remains at 21.11, it can remain stable. If the firm decreases the price in
the long-run, there is a possibility that the firm may have to discontinue supplying their goods
and services (Gaynor, Moreno-Serra, & Propper, 2013).
In short run, the company needs to incur fixed costs. Due to time and capacity, the
company cant alter its output on the basis of demand. If the demand of the good increases
suddenly, a firm will not be able to increase its production in short run due to its existing
capacity and capital. Similarly, if demand decreases, a firm will have to produce until its
production is covering fixed costs. Whereas in long run, all the costs become variable costs.
There are no fixed costs, making breakeven point in long run the minimum point of average cost
curve.

4. Reasons to Discontinue Operations

If the prices of the products decrease to levels below the minimum point of AC curve,
then the company will need to discontinue operations. An alternative to shutdown, would be to
focus all resources to R & D. The firm can focus on innovation of new products, new features
for existing products, new flavor. An additional option would be to control the controllable cost
to reduce cost of production .
5. Maximizing Profits
In order to have maximum profits, the company needs to operate at the point where its
MR is equal to its MC. It is shown as the below:
In order to determine the possible circumstances under which the firm should discontinue
operations, we need to calculate MR by incorporating the demand function from the first
assignment where QD = 38650 - 42P.
QD = 38650 42P =
P = 38650/42 Qd/42 =
TR = PQ = 38650Q/42 Qd2/42=
MR = 38650/42 Qd/21=
920.2380952 0.048Q
Since the firm is monopolistic:
MR=MC
920.2380952 - 0.048Q = 100 + 0.0126424Q =
Q = 820.2381= .0606

Q = 13535
P =595
If the firm gains a profit, there is no need to discontinue its operations, but if the firm is
losing profit in the short-run, they may be able to continue their operation if they conduct layoffs
and increase productivity. In the long-run, they may not have a chance to survive because the
costs are variable.
6. Plan to Evaluate Financial Performance
In order to showcase the firm's financial performance, the monopolist structure should be used.
In this structure the profit maximizing output is achieved by finding that quantity where marginal
revenue equals marginal cost, then projects that quantity on to the market demand curve to
determine what market price corresponds to that quantity (Gaynor, Moreno-Serra, & Propper,
2013).
A monopoly does not have a supply curve because it sets the supply according to the
demand. In most markets, the market price is determined by the intersection of the demand
curve and supply curve. However, for a monopoly, the market price is not set by the intersection
of the demand and supply curves, for the monopolist decides what the supply will be (Gaynor,
Moreno-Serra, & Propper, 2013).
Q = 13534
ATC = :160,000,000 + 100(13534)+ 0.006321299(13534)2
162,511,267.002/13534 =
12007.6
7. Actions to Improve Profitability

The required actions to improve profitability are to have a growth strategy plan that is
well defined and factors in the plan and goals of the business as well as the current market
structure. The firm should have a supportive infrastructure that includes, organization capabilities
that are valued by customers, a management-performance system and scorecard which focuses
on leading indicators and the drivers of growth, and strong leadership practices at every level of
the organization.
Firms should also implement a performance management system and scorecard. Firms
need to determine what should be measured, such as performance outcomes, revenue, and profit
growth. They should also measure customer loyalty as well as employee engagement through
surveys and plans that keep employees focused. This system can implement growth within the
organization .

References
(2015, Month. Day ). In Nestle. Retrieved Aug. 11, 2016, from
http://www.nestle.com/brands/allbrands/leanGaynor, M., Moreno-Serra, R., & Propper, C. (2013). Death by market power: reform,
competition, and patient outcomes in the National Health Service. American Economic
Journal: Economic Policy, 5(4), 134-166.
Mrzov, M., & Neary, J. P. (2014). Together at Last: Trade Costs, Demand Structure, and
Welfare. The American Economic Review, 104(5), 298-303.
Tilson, V., & Zheng, X. (2014). Monopoly production and pricing of finitely durable goods with
strategic consumers fluctuating willingness to pay. International Journal of Production
Economics, 154, 217-232.