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Homework answers / question archive / A number of stores offer film developing as a service to their customers
A number of stores offer film developing as a service to their customers. Suppose that each store offering this service has a cost function: C(q) = 50+0.59 +0.08q”; and a marginal cost MC = 0.5 +0.169. 1. If the going rate for developing a roll of film is $8.50, is the industry in long-run equilibrium? If not, find the price associated with long-run equilibrium. 2. Suppose now that a new technology is developed which will reduce the cost of film developing by 25%. Assuming that the industry is in long-run equilibrium, how much would any one store be willing to pay to purchase this new technology?
Take one multi-national firm of your choice among: Alibaba, GE, Toshiba, Nestle, or LVMH. 2) Please explain the industrial diversification strategy of your company. Your company adopt i) related diversification strategy, or ii) unrelated diversification strategy? Please explain the reason why. (4 points) 3) Please explain the advantages and disadvantages of your diversification strategy above. Do you have any recommendation? (4 points) 4) Now, your company considers to outsource manufacturing to the individual supplier in emerging economies. What is the potential benefits and costs of outsourcing? (4 points)
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1.
Each firm’s profit-maximizing quantity is where price equals marginal cost: 8.50 = 0.5 + 0.16q.
Thus q= 50.
Profit is then 8.50(50) - [50 + 0.5(50) + 0.08(50)2 ] = $150.
The industry is not in long-run equilibrium because profit is greater than zero. In long-run equilibrium, firms produce where price is equal to minimum average cost and there is no incentive for entry or exit.
To find the minimum average cost point, set marginal cost equal to average cost and solve for q:
MC = 0.5+0.16q = 50/q+0.5+0.08q= AC
0.08q2 =50
q=25
To find the long-run equilibrium price in the market, substitute q=25 into either marginal cost or average cost to get P = $4.50.
2.
The new total cost function and marginal cost function can be found by multiplying the old functions by 0.75 (or 75%). The new functions are:
Cnew (q) =0.75(50+0.5q+0.08q2 ) = 37.5+0.375q+0.06q2
MCnew (q) = 0.375+0.12q
The firm will set marginal cost equal to price, which is $4.50 in the long-run equilibrium. Solve for q to find that the firm will develop approximately 34 rolls of film (rounding down). If q = 34 then profit is $33.39. This is the most the firm would be willing to pay per year for the new technology. It will pay this amount only if no other firms can adopt the new technology, because if all firms adopt the new technology, the long-run equilibrium price will fall to the minimum average cost of the new technology and profits will be driven to zero
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2) The company Toshiba which is a global firm selling diversified products and equipments adopted an unrelated diversification strategy, wherein it focused on adding unrelated products and penetrated into the grocery space as it tried to grow specific vegetable produce which were organic. Moving from electronic space to healthy living alternatives in order to complement the company's healthcare business as it tried to promote a better environment and healthy sources of living. Thus instead of focusing on its core business, it tried to diversify in order to produce organic food.
3) Advantages are that the company is not solely dependent on one industry and there are gains from diversifying when one industry suddenly starts reporting losses. Thus the company won't go completely bankrupt as it has other sources of income and industry which is completely unrelated to the original business.
Disadvantages are that the company losses focus on managing several fronts in several industries, this leads to increased costs of maintaining several businesses and not growing ultimately because there is too much diversification.
Recommendation is that the company should diversify when there is an economic boom so that the business which is starting can grow organically and there is no urgency to increase the scale drastically, it can scale up at its own pace and time when the business is all set.
4) Potential benefits of outsourcing are a reduction in costs of production and lower input costs, so that there is an overall increase in profitability. Attaining entry in an emerging market which has a lot of economic scale and expertise so that there is global integration and access to the emerging market which has tremendous demand due to greater levels of population.
Costs of outsourcing are maintaining a global database, managing local and overseas administration, exchange rate risk, overseas political environment, changing rules in overseas emerging markets which reduces the scope of profitability in terms of greater levels of taxation due to a change in regime.
