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East West Analysis

Essay by   •  May 15, 2011  •  874 Words (4 Pages)  •  1,169 Views

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East-West Transportation Analysis

The simulation of the East-West transportation company first scenario is to make a decision whether to stay in the Consumer Goods Division. The senior staff is split between closing down the division and continuing by decreasing output. By reviewing the Average Total Cost, Marginal Cist and Average Variable Cost graph, the decision is made to reduce output and maximized profit. Since Profit = Marginal Revenue, (P=MR), the output was reduced to where Profit=Marginal Revenue=Marginal Cost (P=MR=MC). The given price at this juncture is $55 per hundred weight or 6.75 million hundred weight shipments. The division is able to cover variable cost but not fixed costs.

The 2nd scenario involves East-West Transportation as the only transporter of coal from the Eastern Region with the exodus of the only competitor. Since the company is now a monopoly in this area, determining the price to set to maximize revenue by increasing price and reduce output. Profit, in this case, is found where Marginal Revenue exceeds Marginal Cost (MR>MC). This point is found by extending the line past MR=MC. The main reason the competitor exited this venture was that they were not making any profits. Their Average Total Cost was above the demand curve.

East-West Transportation now faces competition in their Chemicals Division from Far and Wide. Not only has East-West lost the monopoly in this area, but the new comer is cutting prices to compete. Any decision made could incite a price war between the tw0 competitors (a duopoly). In a duopoly it is difficult to know what the other guy is going to do. By stabilizing price for East-West, profits are maximized. Pricing should be determined not only by what was done in the past but by what works for ones one corporation. Starting a price ware can lead to reduced profits for both companies.

Next step for East-Wide is to increase profits for the Forest Products Division. A new lumber car is available for purchase and could mean better service for our customers. Should East-West invest in this lumber car? In a monopolistic competition, it is important to distinguish oneself as different since there is easy entry for all comers into the market. The decision is made to invest the new lumber car and to increase prices to maximize profits. Profit is maximized where Marginal Revenue equals Marginal Cost.

The advantages in a Perfect Competition are for newcomers. There no barriers to entry and many buyers and sellers. Strictly speaking, profits are maximized where MR=MC in the short run. The disadvantages are that in the long run, all costs are variable and each competitor makes zero profit. In this scenario, supply and demand are only limited by the question," Given the demand curve, how much should I supply?" (Collander, 2001).

In this case, demand is elastic.

In a monopoly, the barriers are great to entry and the monopolist is the price setter.

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