Background:

Two weeks ago, your family began to operate a car wash business near a beach resort.

The beginning was tough, but not anymore.

There were many other car washes around this beach resort, but they have been driven out from the market through competing with you. You now own the only car washing business in the area.

Also, you became buddies with the local authorities, and you somehow work out a deal where you have exclusive license to sell car washes in the resort area for the next 10 years.

This is no longer a competitive market.

Recall that, in a competitive market...

• There are many buyers and sellers in the market
  • Each of these parties are relatively small compared to the market
    • There are no longer many sellers, but only you
  • Or, there are many potential sellers (low barriers of entrance)
    • Your exclusive license creates a barrier to entry
• The product is similar across sellers
  • The firm sells products that are similar to those sold by other sellers in the market
    • Since you own the only car washing business in the area, you are selling a unique product

These combinations give you market power: The power to raise price above MC without fear of new entries. In economics, you are now referred to as a monopolist (or a monopolistic firm, rather than a competitive firm).

Our goal in this exercise is to contrast your optimal, profit-maximizing strategy with that derived two weeks earlier for your car washing business, when the market was a competitive one. You are encouraged to pull up the solution you came up with two weeks ago and compare that to how you analyze this one.

The cost structure is identical to what we experienced earlier:

You and your family rented the equipment and the building for the car wash. The business is made possible through a small business loan from an NSU alumni.

• The cost of the loan comes to $15 per day for the next 3 years.
• The business must hire labor and purchase cleaning solutions, car wax, etc. to operate the car wash. Having learned producer theory at Nova Southeastern University in your microeconomics class, you figured out that the cost for labor and supplies is as follows...

Number of Cars Washed	Cost of Labor and Supplies
0	$0.00
1	$10.67
2	$12.67
3	$16.00
4	$20.67
5	$26.67
6	$34.00
7	$42.67
8	$52.67
9	$64.00
10	$76.67
11	$90.67
12	$106.00
13	$122.67
14	$140.67
15	$160.00
16	$180.67
17	$202.67
18	$226.00
19	$250.67
20	$276.67

Here's the difference: You are no longer a price-taker. Since you are a monopolist selling a unique product, you face the entire market demand. Having learned consumer theory at Nova Southeastern University in your microeconomics class, you figured out that the market demand for car wash is as follows:

Number of Car Washes	Price Per Wash
0	$25.00
1	$24.00
2	$23.00
3	$22.00
4	$21.00
5	$20.00
6	$19.00
7	$18.00
8	$17.00
9	$16.00
10	$15.00
11	$14.00
12	$13.00
13	$12.00
14	$11.00
15	$10.00
16	$ 9.00
17	$ 8.00
18	$ 7.00
19	$ 6.00
20	$ 5.00

Question:

Would you suggest increasing or cutting back the number of cars washed from what you were doing two weeks ago (11 units @ $14/unit)? Or are you already operating your business optimally (i.e., profit maximizing)? Try explaining why.

Worksheet (for your convenience) Labor Car Loan and Wash Quantity Payment Supplies Price 0 $ 15.00 $ $25.00 $ 15.00 $ 10.67 $24.00 2 $ 15.00 $ 12.67 $23.00 3 $ 15.00 $ 16.00 $22.00 4 $ 15.00 $ 20.67 $21.00 5 $ 15.00 $ 26.67 $20.00 6 $ 15.00 $ 34.00 $19.00 $ 15.00 $ 42.67 $18.00 8 $ 15.00 $ 52.67 $17.00 9 $ 15.00 $ 64.00 $16.00 10 $ 15.00 $ 76.67 $15.00 11 $ 15.00 $ 90.67 $14.00 12 $ 15.00 $106.00 $13.00 13 $ 15.00 $122.67 $12.00 14 $ 15.00 $140.67 $11.00 15 $ 15.00 $160.00 $10.00 16 $ 15.00 $180.67 $ 9.00 17 $ 15.00 $202.67 $ 8.00 18 $ 15.00 $226.00 $ 7.00 19 $ 15.00 $250.67 $ 6.00 20 $ 15.00 $276.67 $ 5.00