Suppose you are hired to manage a small manufacturing facility that produces Wid

Question

Suppose you are hired to manage a small manufacturing facility that produces Widgets. (30 points) (Part A) You know that you are operating in a monopolistically competitive market, that is, you are a small part of a large market with many competitors in this market. From data collected on the Widget Market, you know that market demand has recently increased and market supply has recently decreased. Name two shift factors and determinants that could have caused the market demand to increase and two shift factors and determinants that could have caused the market supply to decrease. Also as manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility? (15 points) Remember that supply and demand are about the market supply and market demand, which is much bigger than your own company. You are being given data on supply and demand for the whole market and are being asked what effect that has on you as a small part of that market. You want to identify the possible change in market equilibrium price and possible change in market equilibrium quantity based on the shifts in demand and supply and adjust your own price and quantity to match the market. (Part B) Now, suppose that the following changes in demand and supply occur: (1) a complimentary good goes up in price and (2) your costs of production decrease. What decisions will you make regarding production levels and pricing for your Widget facility based ONLY on these changes, for example, do not factor in the changes in part (a) here? (15 points

Explanation / Answer

Part A

Factors leading to increase in demand:

Factors leading to decrease in supply:

Part B

When price of a complimentary good goes up, then demand for the widgets will fall. It is better to decrease the price of widgets so that consumers continue buying them.

When cost of production decreases, supply will increase, leading to a fall in price. In this case, it is better to hoard some production in order to restrict the price from dereasing.

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