Softech Case Study Solution

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MANAGERIAL ECONOMICS BUSI826 – MBA-IB Lucas Medeiros Saint George’s University Grenada As with any company, when starting Softech, our company of software development for smartphones and portable personal computers, one of the first, most fundamental concerns was to make sure that we could, as a company, generate value and thus justify our business model. We needed to reach a value added that justified our operations. In other words, our costs should be covered by the selling price while at the same generating a reasonable benefit for our buyers. Delivering such benefit after covering costs would mean we were able to really create value and ultimately demonstrate our capacity for economic profit. To found Softech then we needed…show more content…
the cheapest way to reach that rate of production. We needed to know how much should Softech request from the Vietnamese company and how much should we request from the Chinese company. Furthermore, I wondered as a manager what the cost for the last 10 software designs was for each company. These were the conclusions we reached: Softech should allocate its production between the two fields where the marginal costs of production are equal at both locations, while creating a total of 50 software programs per month. By doing so, Softech will minimize its monthly costs for 50 software programs. Therefore, our company should request 40 programs to our Vietnamese partner and 10 programs to our Chinese partner. The following table illustrates the numbers justifying this decision: Total cost Marginal cost Production rate (programs/month) Vietnamese company Chinese company Vietnamese company Chinese company 10 $500 $800 $500 $800 20 $1,000 $1,600 $600 $800 30 $1,800 $2,400 $700 $800 40 $2,600 $3,200 $800 $800 50 $3,500 $4,000 $900…show more content…
- in order to maximize profits, we must set prices in a way that residual marginal revenues are equal to marginal cost; - we have to adjust our prices at every change in demand or cost in an attempt to create and maintain a Nash equilibrium; - always follow our competitors’ prices and in any eventuality of them changing theirs we must adjust ours in the same direction (since they are strategic complements); - if we eventually find ourselves competing on capacity while selling homogeneous products then here too we shall set capacity in such a way that residual marginal revenue equals marginal cost; - the same must be done if demand or cost changes (plus trying to maintain a Nash equilibrium too); - if capacities turn out to be strategic substitutes we must adjust it in the opposite direction to our competitors’ capacities; - to avoid having new competition entering the market via strategies of limit pricing, we’d need under that scenario to set prices so low that they couldn’t break even; - in order to apply capacity leadership, it is best to go for capacity to maximize profit considering that our competitors would choose capacity in line with their best response

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