Group+1+Monopoly

=Group 1: Monopoly=

Dreher's Designer Shirt Company, a monopolist, has the following cost and revenue information. Please fill in the table below and answer the following questions based on this information.

__JIMMY BOWENS__ **Produced ** || **Total Cost ** **($) ** || **Marginal ** **Cost ** || **Quantity ** **Demanded ** || **Price ** **($) ** || **Total ** **Revenue ** || **Marginal ** **Revenue ** ||
 * **COSTS ** |||||||| **REVENUES ** ||
 * **<span style="color: #000000; font-family: 'Times New Roman','serif'; font-size: 13.3333px;">Quantity **
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">0 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">100 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">-- || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">0 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">170 || 0 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">-- ||
 * ||  || 40 ||   ||   ||   || 160 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">1 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">140 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">1 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">160 || 160 ||   ||
 * ||  || 44 ||   ||   ||   || 140 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">2 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">184 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">2 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">150 || 300 ||   ||
 * ||  || 46 ||   ||   ||   || 120 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">3 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">230 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">3 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">140 || 420 ||   ||
 * ||  || 50 ||   ||   ||   || 100 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">4 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">280 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">4 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">130 || 520 ||   ||
 * ||  || 55 ||   ||   ||   || 80 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">5 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">335 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">5 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">120 || 600 ||   ||
 * ||  || 60 ||   ||   ||   || 60 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">6 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">395 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">6 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">110 || 660 ||   ||
 * ||  || 80 ||   ||   ||   || 40 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">7 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">475 ||  || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">7 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">100 || 700 ||   ||
 * ||  || 100 ||   ||   ||   || 60 ||
 * <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">8 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">575 ||  || 8 || <span style="color: #000000; display: block; font-family: 'Times New Roman',serif; text-align: center;">95 || 760 ||   ||

1. How much are Dreher's Designer Shirt Company's fixed costs of production?

__JIMMY BOWENS__


 * Dreher's Designer Shirt Company's fixed cost of production is $100 given that the company incurs a cost of $100 dollars whether or not it produces any shirt.

2. On a well annotated graph, illustrate Dreher’s average total costs, marginal costs, demand curve and marginal revenue curve (if you are unable to calculate this information from the table, please graph the cost, demand, and marginal revenue curves for a typical monopolist.)

__JIMMY BOWENS__ .

3. What is the profit maximizing quantity that the firm should produce? What price should it charge for its shirts? What are the firm’s profits at this price and quantity combination? Illustrate your results on your graph.

__JIMMY BOWENS__
 * With a monopoly, MC=MR. This means that a monopoly produces only when its marginal cost is equal to its marginal revenue; it then charges the maximum price that consumers are willing and able to pay (WTP).
 * Therefore, the graph above illustrates that profit maximization quantity for the Dreher's Designer Shirt Company is __6 shirts__, and the profit maximization price is __110__. Recall that MC=MR, so only at this quantity of 6 shirts and the price of 110 does MC (60) =MR (60).

4. Illustrate on your graph the deadweight loss associated with having a monopolist providing these shirt’s. Explain intuitively what is causing this deadweight loss.

__JIMM BOWENS__
 * The Deadweight Loss associated with monopolies happens primarily due to the phenomenon called Excess Capacity. In other words, monopolies do not operate at an efficient level. Monopolies priced their products above MC at the region where MC=MR and the highest WTP price at that region. Because of this, monopolies do not maximize all the surpluses.
 * Another consideration may be because a monopoly market does not have a supply curve.

5. Should or can the government step in to regulate Dreher’s Designer Shirt Company to eliminate this deadweight loss?

Because of the inefficiently low quantity of goods produced, it would be very difficult if not outright impossible for the government to eliminate deadweight loss. In the depicted market, the high monopoly cost discourages some consumers from buying this product. If price were to be lowered, the increase in consumer surplus would exactly match the decrease in producer surplus. Therefore, the total market surplus would remain unchanged, no matter what efforts were made to change it. The only possible exception, as described in the text. If the monopoly were to incur additional costs in the pursuit of maintaining its monopoly, the total costs could be reduced along with total loss if the market were to become competitive.

6. If Dreher can engage in perfect price discrimination, how many units should they produce? What would be their total profits? What is the deadweight loss if Dreher can perfectly price discriminate?

If Dreher could perfectly price discriminate, they would produce 8 units. Any more than that and the cost of producing additional units would exceed the increased revenue. Simply, after 8 units, it would be too expensive to produce more units when total cost is factored in. In this situation, because they could sell to each consumer at the maximum price that consumer is willing to buy, their total profit would be equal to the area between the demand curve and the equilibrium price at 8 units ($95). The total profit would can be represented by the equation: (8 units x $95/unit) / 2 = $760 In situations of perfect price discrimination, there is no consumer surplus, as each consumer is paying the maximum amount that they are willing to pay. There would also be no deadweight loss, because the entire market surplus would be part of the producers profit.