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Managerial Economics - Research Paper Example

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Managerial Economics Managerial Decisions in Competitive Markets 1. Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect to happen to (a) Your firm’s costs of production?…
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Managerial Economics
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Managerial Economics

Download file to see previous pages... The cost of production is dependent on the materials the firms choose. In this case the building materials are the materials for production. It is to be noted that the firm is earning short run profits which are the driver of new firms into the market. As new firms enter into the market, the demand for the materials for production will rise. The chosen firm will also have to buy the materials at higher costs and therefore, the costs of production will rise (United Nations Department of Agriculture, n.d.). b) The price that the chosen firm charges for their services will depend on two major factors: the competition that the firm faces from other competitors and the real estate market. As there is entry of new firms into the market, there is increased competition which will tend to force the equilibrium price down. Therefore, the chosen firm will be forced to charge less for the remodeling services. c) From the above two discussions it is clear that the firm will have to face increased competition and the costs of production will also increase. When new entrants appear in the market, the share of each of the other firms operating within the same industry decreases. As a result, the profits of the chosen firm will decrease. The firm will now enjoy only normal profits. Managerial Decisions for Firms with Market Power 2. ...
How? What evidence might you bring to the hearing? Answer: The Federal Trade Commission is concerned that the merger increased the market power for the firms that merged. However, it is difficult to argue that the market power will not increase if it is assumed that the rivals are close to the size of the merged firms. But it can be argued that the merger was simply aimed to save costs. Suppose the individual firms had to incur some overhead costs while operating as individual units. If it can be argued that increasing market power was not the aim of the merger and if it can be proved that the overhead costs have really decreased while operating as a merged company, then it will provide a foothold in the argument. The concentration of market power will also help to derive the price elasticity of demand. It can also be argued that the market power will not increase as much as in a situation of monopoly and would lack the power to hurt the consumers. In an industry characterized by firms that enjoy similar market shares, it is unlikely that the market power will increase as a result of the merger. The search engine market power tremendously increased because of the deal between Microsoft and Yahoo. The deal was allowed as Google enjoyed a fair power of the market. If the deal would not have taken place, both companies would have began to lose market power which could have hurt the consumers. Strategic Decision Making in Oligopoly Market 3. When McDonald’s Corp reduced the price of its Big Mac by 75 percent if customers also purchased French fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn’t. Within two weeks sales had fallen. Using your knowledge of game theory, ...Download file to see next pagesRead More
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