Assignment:
Chapter: Market Structures and Pricing Decisions Applied Problems
Please complete the following two applied problems:
Problem 1:
Robert's New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 - 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm's cost function is represented by TC = 1500 + 20Q + 0.02Q2.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
a. What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.
b. How much economic profit do you expect that Robert's company will make in the first year?
c. Do you expect this economic profit level to continue in subsequent years? Why or why not?
Problem 2:
Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC's price for the typical lawn system was $1,900 compared with BLG's price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.)
GGC has substantial excess capacity-it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed several hundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows:
Qw =2100 - 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw for the western market and Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC's cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems.
Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.
a. Derive the demand curves for GGC's product in each market.
b. Derive GGC's marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGC's demand, MR, and MC curves for each market.
c. Derive algebraically the quantities that should be produced and sold, and the prices that should be charged, in each market.
d. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to be charged in each market.
e. Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendations.
Required Resources
Text
Please read the following chapters in: Managerial Economics:
• Market Structure and Price Determination
• Pricing Decisions in Practice
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version].
Article
Straits Times. (1997, August 8). Microsoft-Apple Partnership Stuns Computing Industry. New Straits Times - Google search.
Websites
- Bloomberg
- Cable News Network
- The Economist
Discussion 1
Strategic Behavior Oligopolies Discussion 1
An interesting example of strategic behavior comes from a 1997 article about Microsoft's investment in Apple (New Straits Times, 1997). The article is included in the Required Readings list. Facing tough anti-trust scrutiny from government agencies, Microsoft provided financial support to Apple in order to ensure Apple's survival and, therefore, to ensure that competitiveness in the industry remains. Moreover, the partnership with Apple provided an additional market for Microsoft's products - the MS Office and the IE products were to be bundled with the MAC OS as one of the conditions for this financing. Discuss this case in the context of market structure and strategic behavior. What market structure do these firms operate in? Why did Microsoft need to preserve competitiveness in the industry? What was Microsoft afraid of in the event that Apple did not survive?
Guided Response: In 300 words or more, please, provide your response to the above discussion question. Further, do you think Microsoft regrets taking action in light of Apple's performance today?
Discussion 2
Local Market Power Discussion 2
Bulls Eye department store specializes in the sales of discounted clothing, shoes, household items, etc. similar to the offerings at a regular Walmart or Target. Bulls Eye is the only department store in Show Low and the nearest other discount retailer is Target, located 49 miles away in Eagar. Bulls Eye, therefore, has some market power in its local area. Despite having some market power, Bulls Eye is currently suffering losses. An analyst at Bulls Eye is recommending to the manager to raise prices, so that profitability can be improved. The manager is unsure of this strategy as recent data points to increasing numbers of individuals shopping more and more. What are the pros and cons of raising the prices at Bulls Eye and would that strategy be profitable?
Guided Response: Consider demand elasticity and market structure in your response. How is increasing of the price going to impact the company's revenues given its demand elasticity? In 300 words or more, please, provide your response to the above discussion questions.
Discussion 3
Economics in the Current News
Take some time to think about the ways in which your learning in this class relates to the real world. Has the knowledge you gained been valuable in helping you understand or evaluate events or policies? Are there any current events in the news that you can directly link to concepts or theories covered so far?
Guided Response:
Review the popular news websites listed in the Current Events required readings section for this week. In 300 words or more, discuss one current event article and explain how economic theory can be applied to analyze the information presented. Make sure to provide an APA reference to your article.