Question 1: (a) What market structure is used to benchmark allocatee efficiency and why do we use it? Illustrate and explain using a diagram Ans- Perfect competition is an ideal market structure and can be used as benchmark as it characterized by:- • A large number of Small Firms. • The product sold by each firm in the market is similar. • Whereas Buyers and sellers have no entry and exit barriers . • They also have perfect knowledge of prices and technology. This competition will not observed in real world but still its primary function is to provide a benchmark that can be used to measure the real world market structures. For example Horse betting which is also quite a close approximation of Perfect competition. To illustrate we can take Long run equilibrium where, P= MR=SRMC= SRATC =LRAC As Long as there is no changes in above formula variables, then there will no other reason to change its output level or any other aspect of perfectly competative firm beacause the firm attains the equilibrium. We can well undersatnd with the help of graphical presentation of an Long Run Perfectly competitive curve which is depict below. In the above figure we take Quantity of output(units per hour)on x-axis which ranges from 0-12,whereas on y-axis there is price and cost per unit ( in dollars). In Long run Firm attains equlibrium price at $60. According to MR=MC rule the firm get an equlibrium output at 6 units per hour where a firm earns a normal profit as Marginal revenue is equals to short run average total cost curve. On the other side LRAC (Long Run Average cost) and short run average cost are also equals to marginal revenue. Due to allocative an... ... middle of paper ... ...------------------------------70 units (b) What will be its average cost of production at this output?-------$6 (c) How much (supernormal) profit will it make?------------- $2 x 70=140 (d) How much will the firm produce in order to maximize profits at a price Of $5 per unit? ----------------------------------------------At 50 units (e) How much (supernormal) profit will it make? -------------------0 (f) How much will the firm produce in order to maximize profits at a price Of $4 per unit? -------------------------------------------------40 units (g) What will be its profit position now?----------$ 60 (Loss) i.e- $1.50 x 40 (h) Below what price would the firm shut down in the short run? ------This will be at $3.50 (where P = AVC) (i) Below what price would the firm shut down in the long run? ---------At $5 (where P = AC)
Table C projects the break even analysis in both units and dollars as a basis for further projections. As seen in Table C substantially larger sales are required to break even.
[6] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 8, Cost-volume-profit analysis, p. 165-173
There are two solutions that provide the optimal profit given the current constraints under which JP Molasses operates. Under these conditions, the optimal profit is $63,571. This profit margin is achieved in both cases with revenue of $942,354 and cost of $412,333 for material purchased and $466,450 for fixed and variable costs in processing, for total cost of $878,783.
So this is where option 1 comes in. If there is an opportunity for Andrews to reduce costs, increase production to meet increased demand, then that should be quickly taken advantage of. It’s that simple.
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
The sales director proposed that if the firm were to reduce the price of Item 345 to FF15.00/m, they would be able to increase sales to 175,000 units (or 25% of industry volume). But if they were to keep the price at the current value of FF20.00/m, they would be able to sell not less than 75,000 units (or 11% of industry volume).
(Potential $loss if reduce price = 94962.yr but losing market would be a bigger problem.)
Growth: If the product succeeds, sales will grow. Prices could still be high, but with increased competition prices will drop. The producer still advertise at a high level to fight off competition. Product starts to move into profitability.
Rivalry among established firms is fierce. There are several factors that illustrate this: established market players (6.1). The product is highly standardized and the switching costs of the customers are low. Players are aggressive (6.2)
A complete firm maximizes profit or minimizes loss in the short run by producing that output at which price or marginal revenue equals marginal cost, provided price exceeds minimum average v...
...re that the company is able to continue producing high volumes of products thus meeting its financial obligations at the same rate
We know that it was going to be expensive to produce the product but we are confident that no matter the cost of production, our sales would greatly succeed the cost. The cost of producing a 5 oz. can was about 75 to 80 cents if they can produce 100,000 per month. If we were to produce 50,000 cans per month, that cost would rise by 5 to 10 cents per can. A 10 oz. can would cost about 25% more than a 5 oz. can would to produce. With those numbers, 100,000 5 oz. cans would cost us about $900,000-$960,000 per year to produce. 50,000 5 oz. cans would cost us $750,000. 100,000 10 oz. cans would cost us $1.125M-$1.2M a year...
If the company follow this recommendations, it will obtain a profit of $ 531,000 that represents $180,000 more than with seasonal production
In a perfectly competitive market, the goods are perfect substitutes. There are a large number of buyers and sellers, and each seller has a relatively small market share. Perfect competition has no barriers to information regarding prices and goods, meaning there is no risk-taking behaviour – sellers and buyers are rational. There is also a lack of barriers for entry and exit.
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.