ECO 550
B8365
Assignment3SuggestedRelevantTopics.pptxAssignment 3
Suggested Relevant Topics
QUESTION 1
Outline a plan that managers in the low-calorie, frozen microwaveable food company could follow in anticipation of raising prices when selecting pricing strategies for making their products response to a change in price less elastic. Provide a rationale for your response.
QUESTION 1 Suggested Relevant Topics
An inelastic product is a product the demand for which does not change substantially as a result of price changes.
This implies that a company facing inelastic demand can charge higher prices without worrying about loosing consumers.
Necessities and products perceived as unique have relatively low price elasticity of demand
The purpose of making the product price inelastic is to charge a higher price without loosing customers.
Question 1 Suggested Relevant Topics
The managers in the low-calorie, frozen microwavable food company should focus on successful differentiation of their product, i.e., make it less price elastic.
If consumers perceive the product as unique with very few or no substitutes, they will be willing to pay higher prices and will be less sensitive to price increases.
To differentiate its product, a company can design unique packaging, provide clear nutrition information, and increase variety. It can also segment the market based on different demographic characteristics and target different segments with different versions of the product.
Question 1 Suggested Relevant Topics
Appropriate pricing strategies for inelastic products are price differentiation, premium pricing, high value moderate cost pricing, and relative pricing.
Block pricing, two-part tariff, price discrimination such as quantity discounts, versioning, and coupons, as well as bundling could be appropriate pricing strategies for a company in this type of business.
QUESTION 2
Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company.
QUESTION 2 Suggested Relevant Topics
Regulations can be designed to explicitly benefit the economy and particular industries, and can lead to investments that create jobs, improve workers’ health and productivity, and spur technological innovations.
Well-designed and effectively enforced regulations are necessary for the economy to function effectively.
On the other hand, too much and difficult to enforce regulations can substantially increase the costs of doing business and reduce efficiency.
Question 2 Suggested Relevant Topics
In this particular business, food safety is essential.
The Food and Drug Administration (FDA) enforces the Food Safety Modernization Act of 2010. These regulations affect for example packaging and nutrition information.
Question 2 Suggested Relevant Topics
Other regulations affecting the food industry include:
employment regulations
occupational safety regulations
production and product safety regulations
environmental regulations
anti-trust regulations
regulations of advertising
Fiscal policy affects taxes and government spending.
Monetary policy affects interest rates, i.e., the cost of borrowing.
Wage policy affects the cost of labor.
QUESTION 3
Determine whether or not government regulation to ensure fairness in the low-calorie, frozen microwavable food industry is needed. Cite the major reasons for government involvement in a market economy. Provide two (2) examples of government involvement in a similar market economy to support your response.
QUESTION 3 Suggested Relevant Topics
Rationale for government involvement in a market economy:
Providing legal structure – property rights, enforcement of contracts, penalties
Promoting competition – antitrust regulations
Redistribution of income – welfare assistance, social security, Medicare, Medicaid
Providing public goods – national defense, police protection, space exploration
Promoting growth and stability – fiscal and monetary policy
Correcting market failures – pollution, education
Question 3 Suggested Relevant Topics
The government’s regulation in the low-calorie microwavable food industry is justified for the following reasons:
Consumers must be protected from unsafe or harmful food or drugs
Producers have the responsibility to produce and use quality ingredients.
Public safety
Labeling is required to provide consumers with sufficient information.
Question 3 Suggested Relevant Topics
In the low-calorie, frozen microwavable food industry, government regulation and intervention is necessary because consumers do not have sufficient information to make informed choices.
The government role is to force producers to provide this information to the consumers. For example, the government should require proper labeling and nutrition information.
Question 3 Suggested Relevant Topics
Here is a list the most important justifications for government intervention in a market economy:
Consumer protection
Encouraging competition
Preventing monopolies
Consumer protection
Stabilizing the macro economy
Correcting market failures
Providing public goods
Redistribution of income
QUESTION 4
Examine the major complexities that would arise under expansion via capital projects. Propose key actions that the company could take in order to prevent or address these complexities.
QUESTION 4 Suggested Relevant Topics
Complexities of expansion via capital projects:
Substantial financing
Elevated risk
Access to capital markets might be difficult
Potential government regulations/restrictions
Stockholders’ resistance
If the company is considering international expansion, it has to deal with foreign-exchange risk as well as regulatory and tax compliance.
Question 4 Suggested Relevant Topics
Key actions to address complexities of expansion via capital projects:
It is important to use capital budgeting methods to evaluate feasibility of different expansion projects.
Active oversight and scrutiny of capital spending to ensure financial viability
Business and financial risk mitigation
Using a variety of capital resources
Question 4 Suggested Relevant Topics
Other actions that a company could take in order to prevent or address the complexities of capital expansion are:
Focus on core competency
Economies of scale and more control over costs
Access to advanced technology and know how
Compliance and regulation
Risk management
QUESTION 5
Suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers. Indicate the most likely impact to profitability of such a convergence. Provide two (2) examples of instances that support your response.
QUESTION 5 Suggested Relevant Topics
The agency problem
Stockholders and managers have different interests. The managers are mostly interested in their salaries and perks. Stockholders/owners are ultimately interested in the stock price, which increases if the company consistently maximizes its profits.
Self-expansion or a merger can benefit managers, but not necessarily stockholders. Thus, the question is how the interests of managers are aligned with the interests of the stockholders.
Question 5 Suggested Relevant Topics
One way to align incentives is executives’ stock options, which give incentives to managers to behave like owners.
The main idea is to align incentives. Executives’ stock options, for example, give incentives to managers to behave like stockholders/owners.
