Car washing Business

Below is a summary of your business:

1. You now have market power: 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.
2. There is now barrier to entry: Since last week, you have become 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.
3. Your cost structure:
   1. Fixed costs stay the same: 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.
   2. Variable costs are changed: The business must hire labor and purchase cleaning solutions, car wax, etc. to operate the car wash. These variable costs have changed since you started up due to your rearrangements in the operations of the shop. Now, instead of the increasing MC since the beginning until last week, you are able to achieve constant MC. Specifically, each additional unit of car wash comes at an incremental cost of $9. This means MC = $9.
4. There are two types of customers in the market; having been in the business for three weeks, you came up with more in-depth market analyses and are now able to obtain much more detailed customer information:
   1. Locals and Leisure Travelers (Tourists)
      1. These people would like to look sleek, but a good-looking car isn't as important as a decent dinner and/or souvenir
      2. The locals can also wait on getting a car wash during off-season
   2. Business Travelers
      1. These people are meeting up with clients; they NEED good looking cars, right away
   3. Having learned consumer theoryat Nova Southeastern University in your microeconomics class, you figured out that the market demands for car wash are as summarized in the table on the last page of this document: Given the quantity supplied to each group, the highest price that customers in either group are willing to pay is tabulated. For instance, if you supply two units of car washes to the tourists (business travelers) group, their highest willingness to pay is $23 ($34)

QUESTIONS:

1. Assume you have the power to charge different groups of customers different prices for your car wash...

a. How many car washes would you supply to the locals and leisure travelers, at what price?

b. How many car washes would you supply to the business travelers, at what price?

c. What is your total profit if you pursue a strategy like this?

2. If you can only charge the same price to all customers (tourists and business travelers alike)...

a. What would this price be?

b. Are you maximizing your profit with the locals/tourists' group by charging this price? Explain.

c. Are you maximizing your profit with the business travelers' group by charging this price? Explain.

d. What is your total profit?

e. How does your answer in 1c compare to your answer in 2d?

3. Comparing your answers to 1 and 2 above, which situation is more ideal for you as a profit-maximizing monopolist?

4. For the case where you can charge different customer groups different prices, an arbitrage opportunity exists in the market.

a. Explain this arbitrage. (Note: In financial economics, arbitrage is the ability to increase your wealth without investing any money or taking any risk, and basically means "free money" in everyday language. In the After Life video, Tony broke the price discrimination system of a restaurant through ordering from the kids' menu.)

b. How does this arbitrage affect your ability to charge different prices?

5. There are different categories of customers (i.e., tourists vs. business travelers), what is something you can do to identify that a customer is from one group and not the other?