Use the updated demand (Q D ) and marginal revenue (MR) functions below to compl
ID: 1211030 • Letter: U
Question
Use the updated demand (QD) and marginal revenue (MR) functions below to complete this assignment.
Due to changes in the low calorie, frozen, microwavable industry’s market structure, the firm-specific demand equation for our hypothetical company has shifted outward and is now:
QD = 350,000 - 100 P
This function generates the following Marginal Revenue Function (MR):
MR = 3500-0.02Q
Outline a plan that will allow you to identify the market structure in which your company now operates. Comment on the relevant elasticity results from Assignment 1 and your research into two (2) of leading competitors in this industry, taking note of their pricing strategies, profitability, and their relationships within the industry (worldwide).
Note: In Assignment 1, the assumption was that the market structure was perfectly competitive. Changes in the market now suggest it is imperfectly competitive and that your firm now has substantial market power to set its own “optimal” price.
Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Note: The following is a regression equation. Standard errors are in parentheses.
QD = -3,750 - 100P + 25A + 50PX + 8Y
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.90 n = 26 F = 35.25
Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:
QD = Quantity demanded of a unit (dependent variable)
P (in cents) = 300 cents per unit (price per unit)
PX (in cents) = 200 cents per unit (price of leading competitor’s product)
Y (in dollars) = $10,000 (per capita income in the Standard Metropolitan Statistical Area (SMSA) where the 26 supermarkets are located)
A (in dollars) = $750 (monthly advertising expenditures)
Example of Assignment 1 that is referenced in this question:
Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
Note: The following is a regression equation. Standard errors are in parentheses.
QD = -3,750 - 100P + 25A + 50PX + 8Y
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.90 n = 26 F = 35.25
Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables:
QD = Quantity demanded of a unit (dependent variable)
P (in cents) = 300 cents per unit (price per unit)
PX (in cents) = 200 cents per unit (price of leading competitor’s product)
Y (in dollars) = $10,000 (per capita income in the Standard Metropolitan Statistical Area (SMSA) where the 26 supermarkets are located)
A (in dollars) = $750 (monthly advertising expenditures)
Explanation / Answer
In Assignment 1, the assumption was that the market structure [or selling
environment] was perfectly competitive and hence, the equilibrium price can be determined by
setting QD equal to QS.
Putting all the values in QD, we get QD= QS= 5000
Due to changes in the low calorie, frozen, microwavable industry’s market structure, the firm-specific demand equation for our hypothetical company has shifted outward and is now:
QD = 350,000 - 100 P
The company now experiences market power, hence, it will sell where MR = MC
Since, P = 300 cents per unit and in perfectly competitive market P =MC = 300 cents per unit.
Hence, with updated QD, we put MR = MC = 300
and get Q = 160,000
Putting this value of Q in updated demand function, yields P = 1900 cents per unit which is lower than price in competitive scenario i.e. 5000 cents per unit.
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