Monopolistic Competition and Operation Decision Assignment

This assignment analyzes operation decisions within the context of a monopolistically competitive market, specifically focusing on the low-calorie frozen microwaveable food industry. The student examines the market structure, comparing it to both monopoly and perfectly competitive models, and discusses the implications for business strategies. The assignment explores factors influencing demand, including price, income, and competitor actions, and analyzes the short-run and long-run cost structures, including total cost, variable cost, and marginal cost. The student determines the shut-down point, pricing policies for profit maximization, and the impact of market power on price and quantity. Furthermore, the assignment considers strategies for maintaining market power, such as advertising and innovation, and recommends actions to increase profitability, like focused marketing and product differentiation.

Running Head: OPERATION DECISION
Operation Decision
Name of the Student
Name of the University
Author note

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OPERATION DECISION
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................3
Answer 4..........................................................................................................................................6
Answer 5..........................................................................................................................................6
Answer 6..........................................................................................................................................9
Answer 7........................................................................................................................................11
References......................................................................................................................................12

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OPERATION DECISION
Answer 1
The market structure of low calorie frozen microwaveable food industry resembles the
feature of an imperfectly competitive market namely monopolistic competition. It is a market
where characteristics of both monopoly and competitive market. The competitive nature is found
from the presences of numerous number of buyers and sellers in the market, each selling a
slightly differentiated product. Healthy Choice, Lean Cuisine are some existing brand capturing a
major share in the market (Schmidt, Spann & Zeithammer, 2014). The monopoly power of the
brands are reflected from their decision taking power regarding own brand. Once the
characteristic of the low calorie frozen food industry is similar to monopolistically competitive
market, a suitable business plan should be aligned with the nature of this kind of market.
When market structure becomes imperfectly competitive, then sellers enjoy some sort of
market power. For any business, knowledge about availability of close substitute is required. In
assignment 1, even when the market structure was assumed perfectly competitive the price of the
substitute product is taken as an important determinant of demand. With monopolistically
competitive market, though the firm has some market power for controlling price the close
substitutes are still available with a differentiated form (Kaushal et al., 2014). Therefore, the
business should have knowledge about competitor’s product. Markets are segmented depending
on the economic status or specific location. The products then should be delivered targeting a
particular consumer group. There are some behavioral differences in the market pointing to
different buying frequency, choice of brand or preferences towards a particular product. All these
should be included in the business plan.

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OPERATION DECISION
Answer 2
In the imperfectly competitive market, there are possibility of the presence of few firms
in the industry. With reduced number of seller, a greater control over price is realized. Once
major market share of market captured by only few firms, then this can transform the market
structure from a monopolistic competition to an oligopolistic one. The presence of few
dominating firm is one factor causing change in the market structure (Parenti, Ushchev & Thisse,
2017). In the oligopoly market structure few big seller captures a significant share in the market.
In this market, each seller requires to monitor the extent of competition in terms of their pricing,
production and introduction of new products that they can produce.
Various factors can lead to a change in demand. From assignment 1, the likely factors
causing changes in demand are change in the income of customers, own price and price of the
substitute products. As the market structure changes from perfectly competitive to a
monopolistic or oligopolistic competition, the firm should have knowledge about the strategy of
its rival firm (Kirzner, 2015). The strategic interdependence and knowledge of competitor’s
strategy will contribute in profitable operation of the firms.
Answer 3
The operation of monopolistically competitive market is different from that of the
competitive firms. Because of the existence of market power, in the short run price is above the
marginal cost. The optimum price here is determined from equalization of marginal revenue and
marginal cost. The firms in the industry when enjoy a profit above the normal level, new firms
enter in the market (Stiglitz, 2017). The increased supply causes a decline in the equilibrium
price. In view of free entry and exit in the market, firms face a fluctuation in price and demand
situation. In the long run, profit reduces to zero that is firms enjoy only normal profit. The

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OPERATION DECISION
decision of business operation needs information about the short run and long run costs. In the
short run prices should be enough to cover the average variable cost while in the long term price
should be equal to the minimum point of total average cost (Ushchev, Parenti & Thisse, 2014).
The following information of firm’s cost function are given
Total Cost (TC) = 160,000,000 + 100Q + 0.0063212Q2
Variable Cost (VC) = 100Q + 0.0063212Q2
Marginal Cost (MC) = 100 + 0.0126424Q
In the Short run, there are both fixed cost and variable cost constituting total cost. However, in
the long run all the costs are variables in nature (Baumol & Blinder, 2015).
Average Total Cost ( ATC )= TC
Q
¿ 160,000,000
Q + 100Q
Q + 0.0063212Q2
Q
¿ 160,000,000
Q +100+0.0063212 Q
Average Total Cost equals to the Marginal cost at the minimum point of ATC. This help to
determine price and quantity at the optimum level (Currie, Peel & Peters, 2016)
Setting ATC equals MC
ATC=MC
Or, 160,000,000
Q +100+0.0063212 Q=¿100 + 0.0126424Q

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OPERATION DECISION
Or, 160,000,000
Q +100−100=0.0126424 Q−0.0063212Q
Or, 160,000,000
Q =0.00632121Q
Or, Q2= 160,000,000
0.00632121
Or,Q2=25311649687
Or, Q= √ 25311649687
Or, Q=159096.3535 Units
At the level of Q = 159096.3535, the values of ATC and AVC are obtained as
ATC=160,000,000
Q +100+0.0063212 Q
¿ 160,000,000
159096.3535 +100+ ( 0.0063212∗159096.3535 )
¿ 1005.67987+100+1005.67897
¿ 2111.34 Units
AVC= TVC
Q
¿ 100Q+0.006321 Q2
Q
¿ 100+0.006321 Q
¿ 100+ ( 0.0063212∗159096.3535 )

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OPERATION DECISION
¿ 100+1005.67897
¿ 1105.68 Units
Answer 4
The point at which firms close down its operation is known as the shut-down point of
business operation. In the competitive market, the point where prices goes below the minimum
average variable cost is defined as the shut-down point (Kolmar, 2017). In the imperfectly
competitive market, there are several factors responsible for closing down of business operation.
In the monopolistically competitive market the product of each firm is close to is rival firm.
Firms should invest in innovation to make improvement in its product or to reduce cost. Without
innovation, firm lags behind its competitor and may decide to close its operation. Interruption of
steady supply of raw materials hamper production (Nicholson & Snyder, 2014). Firms often fail
to expand scale of operation because of inadequacy of capital.
The management should looks after the cost aspects to maintain continuous operation. In
the short average variable cost and in the long-run total variable cost should be covered to
continue operation. Apart from costs, other issues should also be taken care of. Maintenance of
adequate capital flow, investment in innovation are some other strategies that management can
take to confront the situation.
Answer 5
The objective of firms under imperfect competition is to maximize profit. The suggested
pricing policy is to determine price from profit maximizing condition that is equalize marginal
revenue with marginal cost (Krugman et al., 2015).
The estimated demand function from Assignment 1,

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OPERATION DECISION
QD=−5200−42 P+20 Px +5.2 Y + 0.20 A +0.25 M
Where,
QD = Quantity demanded for 3-pack units
P (in cent) = Price of the product; Given P= 500 cent for 3 pack units
Px (in cent) =Price of leading competitor’s product; Given Px = 600 per 3 packs unit
Y(in dollars)= Per capita income of the standard metropolitan statistical areas located around the
supermarkets; Given Y= $ 5,500
A (in dollars) = Monthly advertising expenditure; given A=$10,000
M= Number of microwave ovens sold in SMSA, where the supermarket located; given M= 5,000
Then, the demand for low calorie frozen food is computed as
QD=−5200−42 P+20 Px +5.2 Y + 0.20 A +0.25 M
¿−5200− ( 42∗P ) + ( 20∗600 ) + ( 5.2∗5,500 ) + ( 0.20∗10,000 ) +(0.25∗5,000)
¿−5200−42 P+12000+28600+2000+ 1250
¿−42 P+38,650
From the direct demand function, the inverse demand function is determined as follows
Q=−42 P+ 38,650
¿ , 42 P=38,650−Q

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OPERATION DECISION
¿ , P= 38,650−Q
42
¿ , P=920.2380952−0.0238095Q
Total Revenue ( TR )=Price ( P )∗Quantity ( Q )
Therefore,
TR=¿(920.2380952−0.0238095Q ¿∗Q
¿ 920.2380952 Q−0.02 38095Q2
Marginal Revenue (MR)¿ dTR
dQ
MR= d (920.2380952Q−0.0238095 Q2)
dQ
¿ 920.2380852−0.0476190Q
At Equilibrium,
MR=MC
¿ , 920.2380852−0.0476190 Q=¿100 + 0.0126424Q
¿ , 820.2380852=0.0602614 Q
¿ , Q= 830.2380852
0.0602614
Or, Q=13611.32412 ~ 13611 Units
Putting the value of Q in the inverse demand function price is estimated as

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OPERATION DECISION
P=920.2380952−0.0238095 Q
¿ 920.2380952− ( 0.0238095∗13611.32412 )
¿ 920.2380952−¿324.0788216
¿ 596.1592736 ~ 596
In the competitive market, equilibrium condition needs price should be equal to marginal cost.
The equilibrium price and quantity in the competitive market is obtained as $384 and 22502
respectively. As the market structure changes, the market price now raises to $596 and quantity
reduces to 136111 units. Therefore, the market power obtained from shifting from a perfectly
competitive market gives the firm opportunity for charging a high price to supply a low quantity.
Answer 6
In a monopolistically competitive industry, firms operate with high level of profits. The
supernormal profit attract new firms to enter in the market. The retaining of market power
requires promotion of the product and make its product more attractive than its competitors make
(Mankiw, 2016). One way to promote product is to invest in advertising. The new firms can
enter the market with new and innovative products and increases the possibility of switching
consumer preferences. This makes difficult to maintain high price and profitability in the long-
run. The firms operate at the minimum point of average variable cost.
Short run profit
Profit=Total Revenue−Total Cost
Putting value of Q, as obtained from equilibrium condition, TR and TC are estimated as
TR=920.2380952Q−0.0238095 Q2

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OPERATION DECISION
¿ ( 920.2380952∗13611.32412 ) − ( 0.0238095∗13611.324122 )
¿ 12525658.98−4411141.882=8114517.1
TC=160,000,000+100 Q+ 0.0063212Q2
¿ 160,000,000+ ( 100∗13611.32412 ) +(0.0063212∗13611.324122 )
= 162532249.4
Producer Surplus:
TR−TVC
Now,TR=P∗Q
= ( 596.1592736∗13611.32412 )
= 8114517.098
TVC = 100Q + 0.0063212Q2
= ( 100∗13611.32412 ) + ( 0.0063212∗13611.324122 )
=1361132.412 + 1171116.994
=2532249.406
TR – TVC = 8114517.098-2532249.406
= 5582267.692
The firm is able to enjoy only producer surplus in the short run.

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OPERATION DECISION
In long terms, as new firms enter in the market surplus reduces. In the long-run, for equilibrium
the tangency condition of demand and total average cost curve is checked.
At the minimum point of average total cost,
Q=159096.3535 Units.
ATC=160,000,000
Q +100+0.0063212 Q
¿ 160,000,000
159096.3535 +100+ ( 0.0063212∗159096.3535 )
¿ 1005.67987+100+1005.67897=2111.34 Units
In order to make profit the firm should charge price greater than the average total cost. If price is
lower than the average total cost then firms incur loss.
Answer 7
The primary objective of firm is to maximize profit. Therefore, recommendations are
made to increase profitability. The company should design an appropriate marketing strategy. In
order to attract a major pool of customers, the firms should have something unique in its product.
This can be achieved through extensive innovation. Therefore, the company should give focus on
adding unique content through innovation.
Another thing that the company should do is to increase advertisement expenditure to
promote its product. In monopolistic competition, advertising plays an important role. In the
world of differentiated product, advertising plays an important role. Therefore, the company
should make attractive advertisement for capturing greater share.

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OPERATION DECISION
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Currie, D., Peel, D., & Peters, W. (Eds.). (2016). Microeconomic Analysis (Routledge Revivals):
Essays in Microeconomics and Economic Development. Routledge.
Kaushal, M., Gupta, A., Vaidya, D., & Verma, A. K. (2014). Microwave Processing In Food
Industry: A Review.
Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press.
Kolmar, M. (2017). Principles of Microeconomics. Springer Texts in Business and Economics
ReDIF-Book.
Krugman, P., Wells, R., Au, I., & Parkinson, J. (2015). Microeconomics: Canadian Edition.
Macmillan Higher Education.
Mankiw, N.G., 2016. Economics-Microeconomics-Principles of Microeconomics.
Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application.
Cengage Learning.
Parenti, M., Ushchev, P., & Thisse, J. F. (2017). Toward a theory of monopolistic
competition. Journal of Economic Theory, 167, 86-115.
Schmidt, K. M., Spann, M., & Zeithammer, R. (2014). Pay what you want as a marketing
strategy in monopolistic and competitive markets. Management Science, 61(6), 1217-
1236.

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OPERATION DECISION
Stiglitz, J. E. (2017). Monopolistic Competition, the Dixit-Stiglitz Model, and Economic
Analysis. Research in Economics.
Ushchev, P., Parenti, M., & Thisse, J. F. (2014). Toward a theory of monopolistic competition.