(a.) You know from data collected on the Widget Market that market demand and market supply have both increased recently. As manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility?
Because supply has increased along with demand it isn't clear what decision should be made. The manager should gather information as far as how much greater the increase in demand has become. It may indicate the need to increase production. On the other hand, the entrance of new competitors could indicate the need for greater advertising to increase brand recognition, or the introduction of new products. Greater demand means that prices can be increased, as long as the demand isn't matched by the increase in supply. In other words, In this case, the manager would increase the supply and price; but is should increase both in a controlled environment so that the total revenue profits does not drop (for example, raising price beyond a certain price might decrease the demand thus reducing overall profit)
Also, the supply should be increased so that Marginal Cost< Marginal Revenue
Remember that supply and demand are about the market supply and market demand, which is bigger than your own company. You are being given data on supply and demand for the whole market, and are being asked what effect that has on you as a small part of that market.
(b.) Now, suppose that following the supply and demand changes in (a), a substitute good goes up in price, and your costs of production increase. What new decisions will you make regarding production levels and pricing for your Widget facility? (Points: 30)
Increase the production levels more than increasing the price as now you can generate incremental net profit at same pricing. If the price of a substitute good increases, then demand for your product should increase....