Investment decisions

Topics: Economics, Supply and demand, Perfect competition Pages: 7 (1752 words) Published: September 1, 2014

Investment decisions: Low Calorie Microwavable food
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The demand function for low calorie microwavable food depends on the price of the good, its competitive good, advertisement expenditure and income of the consumer. From the demand function and the elasticities calculated, it is found that the market for the low calorie microwavable food belongs to a monopolistically competitive market. A monopolistic competitive is characterized by a fair number of buyers and sellers. Therefore people can switch to another brand if a particular brand charges a high price. But a monopolistic competitive seller performs product differentiation. Thus he attracts the consumers. Now, Profit (π) = Total Revenue (TR) – Total Cost (TC)

= P×Q – TC
According to the FOC of profit maximization, we get
dπ/dQ = (d(TR))/dQ - (d(TC))/dQ[Here P is not fixed]
= MR – MC = 0
Therefore MR = MC
Form the elasticity as calculated in the given assignments, we can see that the demand for the low calorie microwavable product is inelastic in nature.

Now, in order to keep their products as inelastic as possible, the firm will try to differentiate its product from other firms’ products. If their product is different from others then the consumers will not find a substitute for that product easily. That will make the demand for the corresponding product inelastic in nature.We all know that the greater the degree of product differentiation, the greater the market power. Therefore, it is advisable for the organization to perform active product differentiation to maximize its profits.

Government intervention can affect the production process. Suppose a product is beneficial for the society. Then the government will encourage the production of the same. In that case, the government might provide subsidy. This will increase the production of the firm and will also generate new employment opportunity for the firm. But suppose that the product is harmful for the society. Then the government should restrict the output of that particular product for the sake of the society. In that case, government intervention will lower the output. This process will also create unemployment in the society. These low calorie microwavable foods are processed and packaged so that they can be readily eatable. In order to ensure a benchmark on the quality of these goods, government intervention is necessary. If the government does not intervene then the quality of these products may decline. Thus it will create externalities. The companies will be inclined towards production of more of the products in order to earn higher profits. But doing so, they may not focus on the quality. Thus the quality of the product will decline which might cause harm to the society. Thus to ensure the minimum quality standards, government intervention is necessary. But government intervention will reduce the production for the firm. As a result employment will also decrease. Therefore, government intervention will generate unemployment for the society. So the firm will never support government intervention. It is true that government intervention may lead to an increase in the price of the product. But at the same time it is also true that a minimum standard will be maintained. Thus the entire society will be benefitted. Thus this government intervention will ensure certain degree of fairness in the low calorie microwavable food industry. All successful small business start-ups eventually face the issue of handling business expansion or growth. According to Sharon Netlon, "Expanding a company doesn't just mean grappling with the same problems on a larger scale. It means understanding, adjusting to, and managing a whole new set of challenges—in essence, a very different business." Now, while thinking about expansion, the organization can either choose labour intensive growth techniques or capital intensive growth...

References: McGuigan, J. R., Moyer, R. C., & Harris, F. H. deB. (2014). Managerial economics:
applications, strategies and tactics (13th ed.). Stamford, CT: Cengage Learning.
Nicholson, W. & Snyder, C. (2012). Microeconomic Theory: Basic Principles and Extensions (11th ed.). USA: Cengage Learning.
Varian, H. R. (2011). Intermediate Microeconomics: A Modern Approach (8th ed.). NY: Norton
Enke, S. (n.d.). Profit Maximization under Monopolistic Competition. The American Economic Review, Vol. 31, No. 2, 317-326. Retrieved from http://www.jstor.org/discover/10.2307/362?uid=3738256&uid=2129&uid=2&uid=70&uid=4&sid=21102582087203.
U.S. DEPARTMENT OF JUSTICE.(n.d.).COMPETITION AND MONOPOLY. U.S. DEPARTMENT OF JUSTICE . Retrieved from: http://www.justice.gov/atr/public/reports/236681.pdf
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