Sample Essay on Assignment 3: Long-Term Investment Decisions

Low-calorie foods have gained significant interest in modern times. Schools, hotels, restaurants and even correction facilities have adopted healthy diets. Everybody wants to live a healthier lifestyle. This paper seeks to outline a plan for managers anticipating price increases. It also examines the government`s impact on production and employment, and examines whether government policies create fairness. Similarly, it examines complexities that may occur under expansion via capital projects. Finally, the paper provides suggestions on how a company can strike a balance between the interests of shareholders and managers.

Question 1

The company`s objective is to keep its product prices as inelastic as possible. This implies that the strategy used in pricing should not affect the manner in which consumers perceive the products. Ordinarily, such demand only possible for basic goods that consumers cannot do without. Unfortunately, this is not the case for products such as microwavable food products.

The demand for low calorie microwavable foods is largely influenced by the price of the product, the price of substitute products, consumers` income and advertisement costs. Given the demand function, and considering the price elasticity, it is safe to conclude that low calorie microwavable foods fall within a monopolistic competitive market. Such a market is characterized by a large number of sellers and buyers. As a result, consumers can switch brands if one brand charges a higher price. Nonetheless, suppliers in a monopolistic market differentiate their products. Given that profit is maximized at the point where MR=MC and given that price is not constant, we can conclude that the demand for low calorie microwavable manufactured goods is not highly elastic. As a result, if the firm seeks to maintain its products as inelastic as possible, it will try to differentiate its products from those offered by competitors. If their products are differentiated from the others, customers will be unable to directly get the substitutes for the products. The greater the level of differentiation, the greater the market power for the firm (McGuigan, Charles and Frederick 34). Consequently, it is possible for the organization to implement high level product differentiation to reap more profits.

Question 2

            Many people believe that the government should regulate the markets to some extent because the market cannot be left to the forces of demand and supply alone. The government is particularly helpful in tackling externalities, offering public goods (which includes public goods and national defense), enforcement of contracts and providing a medium of exchange (money). All these are best provided by the government compared to the private sector (Kleinschmidt, 2).Through policies, the government is able to ensure that corporations do not impose unnecessary costs on the consumers. For example, companies are able to limit their pollution levels and factor in their cost of waste disposal in their production process. This not only benefits the public, but also the companies themselves because it gives the firm an opportunity to demonstrate that its operations are environmentally friendly. According to Thottam (51), a significant percentage of air pollution externality has been brought under control through regulations aimed at correcting the market failure. In 2011, the U.S. Environmental Protection Agency published a congressional report on the cost-benefit analysis of the Clean Air Act Amendments of 1990. According to the report, although the implementation of the Act cost to $53 billion, its benefits were valued at $1.3 trillion. In 2010 alone, the Act helped save approximately 160,000 lives (Thottam 51).

Government policies can affect employment and production positively or negatively. For example, the Affordable Healthcare Act requires employers to pay health insurance if they have 50 or more employees. This discourages small businesses from expanding their workforce. As a result, they only hire up to the 49th person and stop there.  Similarly, offering subsidies to farmers can increase agricultural output and employment because it allows local farmers to compete with products from other countries. Similarly, unfavorable government policies can force companies to outsource their operations to foreign companies  leading to loss of domestic jobs. In addition, good policies can encourage technological innovations leading to increased productivity. In terms of the impact on our company, the technological innovations occasioned by government policies can benefit the company and offset compliance costs. In addition, workplace health and safety policies can help reduce the number of sick workers thereby reduce sick leaves and increase productivity.

Question 3

The main reasons for government`s intervention in a free market are to correct market failure, provide public goods such as roads and in situations where the public is unable to judge what is best for them because of imperfect information. Without government regulation in the frozen microwavable food industrymarket failures cannot be corrected, companies in the industry can engage in mergers leading to the creation of monopolies, which creates a platform for consumers to be exploited through high prices and substandard products. As a result, the government regulates mergers and acquisitions of prevent creation of monopolies. The main benefit of market economy is to achieve optimum production capacity, and this may not be the case under a monopoly. Similarly, without government`s involvement, price stability may be difficult to achieve. Increased competitive pressures will lead to price competition causing instability in prices(Kleinschmidt 2).

One example of government in the market was the decision by the UK`s competition commission to block the merger between The Royal Bournemouth and Christchurch Hospitals trust and the Poole Hospital Trusts on grounds that it amount to eliminating competition and denying patients the right of choice (BBC News 1). Another example is in the U.S. where the laws protecting the rights of U.S. citizens from unfair business practices permitted the government to open a case against former Tyco`s CEO Dennis Kozloski for stealing shareholders` money to the tune of $100 million (Thottam 48).

Question 4

Before a firm decides to expand its operations, it has to take into account the capital budgeting decision. For instance, before a merger decision is made, the firm must determine that benefits, costs, and risks of the merger are worth pursuing. One of the major complexities in relation to such projects is the source of capital. For example, assuming a company in the movie industry wants to expand, there may be conflict between management and shareholders on the source of funding. Whereas company managers may be interested in using shareholders` reserves as a source of capital, stockholders may not support the same(Xie 2). In making such decisions, numerous factors have to be considered. These include the cost of capital (the interest to be paid), the ease of obtaining capital, and the expected return on the capital. To resolve such complexities, management should lay out the likely benefits to be obtained from the merger, which include enhanced technology and more resources that will allow the company to make more profits. By doing do, shareholders will appreciate that failure to implement the merger will make the business lose profits and it will continue to be inefficient in the use of resources and technology and may suffer losses(Kleinschmidt 2).

Question 5

            There are three factors that combine to develop convergence between the interest of managers on one hand, and the interests of stockholders on the other hand. These factors are referred to as the strategic decision makers that include mangers, directors, and financial commitment and organizational integration. Managers often have a controlling interest over a firm`s affairs. Shareholders have less control over the actions of management even though they own the firm; conflict between the two parties happen when each of the parties seeks to increase their own benefits. Whereas shareholders are more interested in maximizing their returns, managers are primarily concerned in getting more allowances and incomes. In this regard, managers may oppose mergers between their firms and other companies because this threatens their job security. On the other hand, shareholders are interested in reducing their risks by diversifying in as many businesses as they can (Xie 2). To create convergence, the salaries and allowances that managers earn should be tied to the profits they generate to shareholers. In this way, their pay package will only increase by  a percentage of profit they create in a particular accounting period. Doing so will ensure that the interests of shareholders and management are met because when the company makes more profits, shareholders get higher dividend payout for the shares they hold and the value of their shares increases. At the same time, managers also get a higher pay for their effort (O’Sullivan & Sheffrin 23). As a result convergence leads to the satisafction of all stakeholders.

In the modern business environment, both public and private entreprenurs expect to benefit from their businesses. However, in some instances, management may behanve unethically by pursuing their own interests and foregeting the interests of other stakeholders including shareeholders, employeess, and customers. According to O’Sullivan & Sheffrin (22), it is the responsibility of management to control a firm`s internal sources of revenue and also the external sources of funding from donors and financial institutions, and ensure the interest of stockholders is upheld at all times. When this is done, shareholders will have no doubt in management. In this regard, the Securities and Exchange Commission (SEC) requires companies to disclose and publish information about their financial position on a regular basis. Specifically, companies are required to publish their financial statements on quarterly, half yearly and annual basis as a way of ensuring that shareholders understand how their company is being managed and that they have a true and fair picture of the firm`s correct financial position now and in the future. Therefore, transparency in a company`s financial reporting helps in promoting convergence between the interest of stockholders and those of management(Xie 2).

            In conclusion, the government`s role in a market economy cannot be underestimated because without regulations, efficiency expected from the market may not be achieved. Secondly, organizations have to choose on whether to expand through capital projects or mergers. However, it is worth noting that capital projects may have fewer benefits compared to a merger. Finally, the paper has examined how convergence between the competing interests of shareholders and management can be achieved.


Works Cited

BBC News. ‘Dorset Hospital Trusts Merger Plan Blocked’. N.p., 2015. Web. 2 June 2015.

Kleinschmidt, Janice. “The Benefits of Entering the Global Marketplace – Specialty Fabrics Review.” Home – Specialty Fabrics Review. Dec. 2008. Web. 2 June 2015.

Lin, Jiaoqiao. `US buys Chinese goods and smog`. New Scientist 221.2953 (2014):6

McGuigan, James R, R. Charles Moyer, and Frederick H. deB Harris. Managerial Economics:Applications, Strategy And Tactics. Australia: Thomson/South-Western, 2011. Print.

O’Sullivan, Arthur and Sheffrin, Steven. (2006). Economics: Principles & tools. Upper Saddle River: Pearson Education Inc.

Thottam, Jyoti.`Can This Man Save Tyco?`. Time, 163.6 (2004):48-50. Web. 2 June 2015.

Xie, Jun. Board governance and managerial short-term incentives. Management Science & Engineering  4.1(2010):2