Microeconomics Stockholders And Managers - Click to Get Solution

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. 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. 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. 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. 5. Suggest the substantive manner in which the c ompany 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. Answer: The assignment will analyze a case of low-calorie frozen microwavable food company, which is discussed in the previous assignments. It will analyze the strategies adopted by the firm when the cost of production has increased. The paper will examine the effect of government policies on production decision and employment. In addition to this the paper will discuss which policies of the government ensure fairness in this particular industry. Further, the paper will discuss the complexities faced by the firm while expanding via capital investment. The paper will also suggest the way in which the convergences between interests of stockholders and managers will be established. Pricing Strategy The low-calorie, frozen microwaveable food company competes in a competitive market. The costs of major ingridients have been increased. Therefore, it might force the firm to increase its price. While taking its pricing strategy, the firm has to keep in mind that a hike in the price of the commodity may hinder its sales. Moreover, rise in price may lead to social unrest (Bellemare, 2015). This is because, if the price is high, consumer will buy less. However, the cornerstone of the pricing strategy is the foundation of theory of price elasticity. If the elasticity of demand is high, then a rise in price will lead to a significant fall in demand. Then the firm will lose market share. In contrast, if the demand is less elastic, then the rise in price will not affect the quantity sold. As found in the previous assignment, the low-calorie, frozen microwaveable food is elastic in nature. Hence, it is expected that if this firm increases price of its product, then the demand will fall dras tically. Hence, even if the cost of inputs has increased, the company cannot increase its price to cover the cost . However, this company can adopt price discrimination strategy, by charging different prices for different groups of consumers or different price for different units sold (Baumol Blinder, 2015). However, in spite of depending upon the demand elasticity of the product itself, the company can focus on adopting some strategies that will make its product as inelastic as possible. The company can provide certain extra features in its products and services. It can also ensure the customers about their high quality foods. Moreover, it can go for world class marketing, so that the consumers perceive their product as different. In this ways, the microwaveable food company can make their product inelastic in nature. Hence, their decision of raising price will not lead to loss of market share. Another important thing of this case that must be mentioned is that, the cost of ingredients has been increased. The inputs or the raw materials for this low-calorie, frozen microwavable food is same for all firms under this industry. The industry is a duopoly market as discussed in the previous assignment. Therefore, cost of production of another firm has also increased. Hence, the company consi dered in this assignment, is not alone who is suffering from the hike in the rice of inputs (Poelman et al., 2014). It can also change its production process to overcome the increased cost of raw materials. The companys focus will be to keeping price same as before. Otherwise, it has to emphasis on making its product less elastic, so that a price change has less effect on its amount of sales. It will compete with its competitor and expected to be engaged in a price-war (Wang et al., 2015). Effect of Government policies on Production and Employment Government implements rules and regulations in its policies to guide business. It cannot intervene or force a firm in taking its decision directly in a competitive market. But still it has some influences on profitability and competitiveness of the business. In this case, the government can specify which product is to be produced or what should be the production process. Here, the company is producing low-calorie frozen microwavable foods. The government can put in effect some policies which can regulate the food production to protect consumers from any damage (Nicosia Pacifici, 2012). Hence, the low-calorie frozen microwavable food company must ensure that they are adhered to the standard set by the government. Failure to meet those norms will lead to a legal issue that will be faced by the company. Moreover, if the problem of the economy is obesity, then the government will encourage the production of this type of foods, which is of low-calorie. It might give subsidy to the compan y, if it thinks the production of this kind of food is generating welfare in the society (Hawkes et al., 2015). Oppositely, if the population requires healthy foods then the government might not encourage production of this kind of packaged food. The government can also penalize if the packaged food is processed a way before it is in the store (Gan et al., 2013). Periodical report on the quality of the food must be submitted to the concerned department of government for verification. Like production, the government can also affect the employment of this industry (Harvey, 2014). This means that, it can regulate the way the firm follows while recruitment and sometimes regulate the minimum wage given by the company to its workers. Every firm or business unit have to follow the rules set by the government. A low-calorie frozen microwavable food producing company will also be impacted by these policies taken by government, as they must follow the norms and regulations regarding the number of employment and minimum wage (Meer West, 2015). The company must not fail to follow the policies; otherwise it will lose reputation and will be heavily penalized. Ensuring fairness in the industry by Government The low-calorie frozen microwaveable food industry is an example of duopoly, as discussed in the previous assignment. It is necessary to enact rules in this industry to maintain fairness. Though there are supposedly two giants in this industry, there are also small businesses, which are unable to capture the market share due to tough competition. In this duopoly market the firms can utilize their well-position and power to manipulate the price. This will be an unfair competition with no level playing field. To control this unfairness to the small enterprises, the government can regulate the price of the product (Bond Goldstein, 2015). By this way, the government is supporting to survive the small and medium firms. Therefore, the government is ensuring the fairness in the market which is required by this industry. It is necessary for the government to interfere in the market economy for certain reasons. The large firm can exploit officials to get some favors or can manipulate the report after the scrutinizing quality of the processed foods. However, the small firms may not have the courage or sufficient ability in this regard. Hence, government must strictly regulate the activities of these large firms. Moreover, the government should intervene in this industry in order to distribute resources to every firm according to their need. If the distribution is left in the hand of market economy, the powerful firms can acquire all raw materials, and there will be an induced-scarcity of food. To avoid these circumstances, the government intervenes in this market economy. This kind of market intervention can be seen in case of international trade, where government imposes import substitution policy to protect domestic small businesses in front of the global competition. Complexities under expansion through capital project A firm might alter its production process or might expand its business in order to be more competitive in the market. By investing in capital project a firm attain new asset. Hence, it requires capital involvement to modify its business. However, such projects might face some complexities. The main problem that arises is that such project requires huge capital, which may lack. So due to lack of sufficient cash, the project implementation might be hindered. Moreover, even if there is sufficient funding, the project cannot be taken forward if there is no proper planning. A low-calorie frozen microwavable food company cannot achieve good results if it does not plan effectively regarding its capital investment. In the long-run capital project the firm might set up a new business unit in a new city or new country. There may be any political issues or even less demand for this kind of processed food. If in the mid of the project some difficulties found, the amount invested will be lost tot ally. In order to avoid such complexities, the firm must take certain measures. Before, implementing such plans, the company must check whether it has sufficient cash requirement, apart from any loans taken, to initiate the project. It must have proper planning about every single detail about the project (Hessler, 2016). Moreover, the company should go through a prior analysis of the particular market where it wants to set up a business. So while expansion via capital project, the firm must have some idea about the market of its new project. Moreover, to avoid complexities in future capital investment project, the company should engage its resources in R D to trim down its cost of new project. Convergence between interest of stockholders and managers The stockholders are mainly the directors of the company. They always want to increase the value of their share. Similarly, the managers also have the same interest. Hence, they are always found in conflicts regarding their interest. It is crucial for the company to establish convergence between the interests of these two parties. Some strategies can create union among them. Providing remuneration of the managers according to their performance can guarantee the convergence between the shareholders and managers. For example, if the shareholders, specifically the board of directors decides to award the managers by giving them stock options, then the motivation of the managers will be enhanced (Hill, Jones Schilling, 2014). They will further perform hard to increase the value of the companys share. Thus as share value increases the stockholders will be benefitted. There will be a convergence of interests of managers and shareholders. The most likely impact of profitability of this conv ergence is that, providing stock options to the managers of the company might also make them stockholders at some period of time. Hence, the interests of managers get associated with the interest of the stockholders. As a result of this the managers will be dedicated to serve the welfare of stockholders (Kieschnick, Laplante Moussawi, 2013). In this way, the value of this company will increase, as more shareholders will be attracted. The performances of the managers will be good enough. Hence, the low calorie frozen microwavable food company will be benefitted as a whole, as the interests of managers and shareholders has converged. References Baumol, W., Blinder, A. (2015).Microeconomics: Principles and policy. 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