Long Term Investment Decision

This article discusses the long term investment decision for a low calorie frozen microwaveable food company in a monopolistically competitive market. It covers pricing strategy, government regulation, market imperfections, business expansion, and profit distribution.

Running Head: LONG TERM INVESTMENT DECISION
Long Term Investment Decision
Name of the Student
Name of the University
Author note

1LONG TERM INVESTMENT DECISION
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer 5..........................................................................................................................................6
References........................................................................................................................................8

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Answer 1
In the modern world, health has become one of the increasing concern for people. In
order to achieve a stable health condition people are shifting their food habit towards a more
healthy diet. In the healthy diet, low calorie food takes place of earlier unhealthy and high
calorie food. With changing food habit, demand for low calorie frozen microwaveable food
items have increased. Apart from personal consumption, demand for low calorie food is coming
from restaurant business, schools and other places (Kramer, 2016). The increased preferences
give the firm opportunity to earn a greater profit. The immediate response to an increased
demand is to increase the price. Revenue of a firm depends on both price and quantity sold.
Therefore, before selecting pricing strategy the company should have knowledge about the
elasticity of their product. If demand is elastic, then increasing price means a greater
proportionate reduction in demand, which reduces company’s revenue.
To have a successful price increment of their product, firm should focus on strategy to
make the demand inelastic with respect to price. Food is considered in the category of necessary
goods and hence likely to have a relatively inelastic demand. It becomes difficult to adjust the
demand for these goods (Foxall et al., 2013). However, the demand for low calorie frozen
microwaveable food is relatively elastic. The estimated own price elasticity of demand is -1.19.
An elasticity measure greater than 1means demand changes exceeds change in prices. Therefore,
unless the demand has made relatively inelastic the price hike is not a feasible strategy as it then
adversely affect revenue.
The low calorie frozen microwaveable food industry is now operate in a monopolistically
competitive market. The availability of substitute make product demand more elastic. One way

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to make demand inelastic in the monopolistically competitive market structure is to maintain
uniqueness of the product by continuous differentiation and innovation. When people get
something unique then they start relying on the specific brand and willing to make high payment
(Bijlsma, Boone & Zwart, 2014).However, this need something more than common
differentiation like change in packaging and other. Some additional ingredientsthat are beneficial
for health can be addedto secure a stable customer base. In addition, the firm can provide some
attractive offer. The degree of differentiation determine the extent of market power and reduce
demand elasticity.
Answer 2
In the form of perfectly competitive market, there is no need of government regulation.
The market functions best and ensure socially optimum level of output without any regulation.
Market structure other than perfect competition such as monopolistic competition, monopoly or
oligopoly give seller some form of market power (Baker, Bloom & Davis, 2016). There are
circumstances where government intervention is needed protect interest of the buyers and
increase market efficiency.
The efficient operation of market depends on the competitive environment. In presence of
market power, the competitive condition is often hampered and hence needed government
regulation. Analyzing the specific circumstances, government designs its regulatory framework.
The business operating in the nation has to comply business rules and regulation set by the
governments. Local, state and federal government sets rules. Rules are designed to address the
issue of externality. Government rules are set to achieve a targeted environmental goal. When the
activity of business generates pollution, then a pollution pay tax is imposed on it (Coase, 2013).
Government force the firms to adapt new technology that can reduce pollution. Without

4LONG TERM INVESTMENT DECISION
government intervention, business does not consider the external cost of pollution. The payment
of tax or adaption of new technology raises cost of firm and hence affect profitability. The
corporate tax, complex process of licensing are some other regulatory form affecting business
activity.
In the presence of government regulation, the low calorie frozen microwaveable food
company will be affected in the same fashion. If the government increases corporate tax or
impose some additional tax then the company, increases price to make the tax payment
(Bernstein, 2015). The form of regulation determines the specific impact on the company. In
order to prevent unnecessary price hike government may consider setting up a ceiling price so
that goods in the industry cannot be sold above that level. This by reducing the scope of product
differentiation reduces profit.
Answer 3
Government designs rule to correct imperfection of the market resulted from production
or distribution of goods. In the perfectly competitive market, agents make decision that is best
for them. The government regulatory framework intends to protect social interest. The possibility
of inefficiency in the market calls for government intervention.For the industry of interest, in the
monopolistically competitive market structure there are possibilities that firms may merger. Once
the firms merged, it behaves like a monopolist and exploit their market power that hurt consumer
interest. The merging leads to more concentration in the market. It will then able to charge a high
price like pure monopolist (Stiglitz & Rosengard, 2015). Here comes the role of government.
Government should make the possibility of merging as least as possible by reducing the resulted
benefits from merging. The market structure of monopolistic competition always hold some
excess capacity in the long run. That is firms operate below the efficient point of operation. This

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opens another channel of government intervention where government intervenes to absorb the
excess capacity and make operation at socially optimal level. Government can regulate entry and
exit of firms in the industry.
Government in US intervenes to regulate some specific industries in the nation. Examples
include manufacturing industry and banking industry. The operation of manufacturing plant
generates smokes causing a negative externality (Rees, 2017). The owners of the plant do not
consider the social cost of pollution. Hence, US government implements environmental laws and
make a strict enforcement of these laws. In natural monopolies andbanking, industry the
government often intervenes. Government has enforced laws to prevent formation of cartels and
secure interest of the citizen.
Answer 4
In the long run, business considers expansion to operate at large scales. Several factors
determine the expansion of business. Some key determinants are risk associated from such
expansion, return on investment and possibility of recovering cost. If the firm decides to expand
by undertaking capital project, then the key issue arises is sources of added capital. The capital
projects requires a strong capital base to complete the project. If the projects focus on capital-
intensive technology then additional capital is required to employ new machines and
technologies. Even if the projects are labor intensive, then capitals are needed to finance the
wage cost (Piekkari, Welch & Welch, 2014). One way to arrange the capital is to sell existing
stocks. Alternatively, the firm can take loans from financial institution.
The expansion of business creates troubles in business operation. Some managerial
problem arises with increasing size of firms. The large-scale operation of business increases

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workload. Many workers are unable to tackle the additional pressure and quit their jobs. The loss
of experienced workers hampers the productivity of the firm. To raise funds for the capital
project firms aim to reduce cost. In order to reduce wage cost firm consider reducing strength of
labor force. The high turnover rate and increased capital cost makes such expansion costly.
These complexities should be taken into consideration before making business expansion.
Strategies should be taken in advance to counter this situation. Rather taking loan or selling
stocks the company should find alternative ways for fund generation. The company can
undertake additional projects that raise funds and expands business at the same time. Once finds
come from different channels then risks are minimized. Appropriate cost estimation is another
aspect for successful capital project (Cavusgil et al., 2014). There are different ways of
estimating cost. The difference between cash flow with capital investment and without
investment shows the cash flow stream. There are some costs of production that though incurred
by the firm but are not considered as production cost. For example, sunk cost. While making cost
estimate this should be excluded. Proper strategies covering these areas of risk increase the
possibility of successful expansion with capital project.
Answer 5
Business expansion with capital projects leads to some inevitable conflicts between
managers and company stakeholders. The conflict exists in the form of profit distribution
between shareholders and managers (Lawrence & Weber, 2014). Managers receives bonus while
shareholder enjoys part of the profit as debenture. While designing policies interest of both
groups should be served.

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One strategy is to offer deferred stocks to the managers. The shareholders purchase these
stocks at a discount and raises potential profit for shareholders. Good performance of the
mangers yields higher return for the company and for the shareholders as well. By linking
interest of both group convergence between managers and shareholders is possible.
This kind of strategy is followed by several companies to expand their business. Procter
and Gamble is one such company. The company has started a scheme of performance bonus and
provided fixed fees to benefit both groups. In 2009, Fortunes 500 adapted strategy of selling
deferred stocks (Wheelen & Hunger, 2017). P&G offers its executives opportunities of earning
bonus payment for outstanding performance and enhancing sales and profits.

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References
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The
Quarterly Journal of Economics, 131(4), 1593-1636.
Bernstein, M. H. (2015). Regulating business by independent commission. Princeton University
Press.
Bijlsma, M., Boone, J., & Zwart, G. (2014). Competition leverage: how the demand side affects
optimal risk adjustment. The RAND Journal of Economics, 45(4), 792-815.
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L.
(2014). International business. Pearson Australia.
Coase, R. H. (2013). The problem of social cost. The journal of Law and Economics, 56(4), 837-
877.
Foxall, G. R., Yan, J., Oliveira-Castro, J. M., & Wells, V. K. (2013). Brand-related and
situational influences on demand elasticity. Journal of Business Research, 66(1), 73-81.
Kramer, C. S. (2016). Consumer Demands: A Balancing Act. US Agriculture in a Global
Setting: An Agenda for the Future, 105.
Lawrence, A. T., & Weber, J. (2014). Business and society: Stakeholders, ethics, public policy.
Tata McGraw-Hill Education.
Piekkari, R., Welch, D., & Welch, L. S. (2014). Language in international business: The
multilingual reality of global business expansion. Edward Elgar Publishing.
Rees, J. (2017). Natural resources: allocation, economics and policy. Routledge.

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Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International
Student Edition. WW Norton & Company.
Wheelen, T. L., & Hunger, J. D. (2017). Strategic management and business policy. pearson.