31 May BUS 640 Week 4 Market Structures and Pricing Decisions Applied Problems
Market Structures and Pricing Decisions Applied Problems. Please, complete the following 2 applied problems in a Word or Excel document. Show all your calculations and explain your results. Submit your assignment in the drop box by using the Assignment Submission button.
1.) A small company that manufactures plastic vacuum-suction covers for round household plates has a monopoly, which is safeguarded by a utility patent. The market demand curve for this item is approximated to be: Q = 6009 – 25P where Q is the quantity of dish covers for each year and P is in dollars. Expense approximation processes have established that the firm’s expense function is shown by TC = 120 + 2500Q – 0.25*Q2.
a. What is the profit-maximizing price and output level? Solve this algebraically for equilibrium P and Q and also plot the MC, D and MR curves and illustrate the equilibrium point.
b. What profit do you expect that the firm will make in the first year?
c. Do you expect this profit level to continue in subsequent years? Why or why not?
2.) Greener Grass Company (GGC) competes with its major competitor, Better Lawns and Gardens (BLG), in the delivery and installing of in-ground lawn watering systems in the prosperous western suburbs of a main east-coast town. Previous year, GGC’s price for the standard lawn system was $1,995 compared with BLG’s rate of $2,100. GGC set up 9,130 systems, or roughly 55% of total sales and BLG set up the remaining. (No doubt, several additional systems were set up by do-it-yourself householders because the components are easily available at hardware shops.) GGC has significant additional capacity-it could easily set up 25,000 systems yearly, because it has all the necessary machines and can easily employ and teach installers. As a result, GGC is thinking about growth into the eastern suburbs, in which the people are less prosperous. In earlier years, both GGC and BLG have set up many hundred systems in the eastern suburbs however typically their sales attempts are met with the reaction that the systems are very costly. GGC has employed you to propose a pricing method for both the western and eastern suburb markets for this coming season. You have approximated two distinct demand functions, as follows:
Qw=1,035.548 – 6.07164Pgw + 2.83Pbw + 2,100Ag – 1,500Ab + 0.2348Yw
for the western market and
Qe=49,714.29 – 30.7692Pge + 6.984Pbe + 1,180Ag – 950Ab + 0.0825Ye
For the eastern market, where Q means the quantity of items sold; P means price level; A means advertising budgets of the companies (in millions); Y means average disposable income levels of the possible buyers; 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 desires to invest $1.5 million on advertisements this coming year and desires BLG to invest $1.2 million on advertisements. The average family disposable income is $55,000 in the western suburbs and $25,000 in the eastern suburbs. GGC does not hope BLG to modify its price from last year, because it has already distributed its shiny pamphlets (with the $2,100 price mentioned) in both suburbs, and its TV advertisement has already been made. GGC’s expense structure has been approximated as TVC = 755.363Q + 0.005Q2 where Q shows single lawn watering systems.
a. Derive the demand curves for GGC’s product in each market.
b. Plot graphically the demand and MR curves for each market, and also show GGC’s combinquantities that should be manufactured and sold, and the prices that should be charged, in each market.
c. Confirm your quantity and price results algebraically.
d. Calculate the price elasticity of demand in each market and discuss these in relation to the prices to be charged in each market.
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