Econ 1101 Assignment 4

Due: 2:30pm Friday November 13th in drop box at 6206 University Ave.

NOTE: Make sure to write your name, your student ID number, your professors name, and your section number on your assignment. If you have worked as part of a group, make sure that all members of the group have their names and ID numbers on the assignment. A group should have no more than three members. Ned has been celebrating his success in being voted in as Treasurer in the last Student Council election on campus. However, he is now under a deadline to prepare his financial report for the next Student Council meeting. He must review the revenue and expense statements for Razzle Dazzle - a student run business on campus producing environmentally friendly t-shirts with original artwork. Ned is also an economics major and now that he has studied Perfect Competition and Monopoly, he is curious about the pricing and output outcomes for Razzle Dazzle. The following table provides the market prices and corresponding quantities of t-shirts demanded in this market as well as total costs of production for Razzle Dazzle.

Quantity Price Total Costs Total Revenue

Marginal Revenue

Marginal Cost

0 $13 $0

1,000 $12 $6,000

2,000 $11 $12,000

3,000 $10 $18,000

4,000 $9 $24,000

5,000 $8 $30,000

6,000 $7 $36,000

7,000 $6 $42,000

8,000 $5 $48,000 a) Complete the table above, providing total revenue, marginal revenue and marginal

cost. (2 points) b) Draw, by hand, a graph showing the demand, marginal revenue, and marginal cost

curves. (1 mark) c) If Razzle operates as a non-price discriminating monopolist, what will be the profit-

maximizing level of output and price per t-shirt for the firm? (2 points)

d) Assuming Razzle could operate as in c) above, what will be the level of profit in the long-run? Briefly explain what would have to be true in order for profit to persist in the long-run for Razzle Dazzle. (2 points)

e) Assuming Razzle is able to operate as a monopolist in this market and does not price discriminate, what is the value of consumer surplus at the point of profit maximization? Show your calculations. (2 points)

f) In addition to operating as a monopolist, assume Razzle is also able to perfectly price-discriminate. What will be the level of output with perfect price discrimination? (1 point)

g) What is the total revenue and profit for the business if they perfectly price-discriminate? (2 points)

h) If Razzle perfectly price-discriminates, what would be the price they would charge for the 1,000th t-shirt and for the 3,000th t-Shirt? How likely is it that Razzle would be able to perfectly price-discriminate? Briefly explain. (2 points)

i) Alternatively, if Razzle is broken up into many small firms that are forced to operate as a perfectly competitive industry, what will be the profit maximizing quantity of t-shirts produced and the price charged per unit by the firm in the long-run? (2 points)

j) If Razzle is a perfectly competitive firm, what is the value of consumer surplus? (2 points)

k) On your graph, from b) above, show the non-price discriminating monopoly price and quantity and the price and quantity in a perfectly competitive industry. Indicate the consumer surplus for the non-price discriminating monopoly and that for perfectly competitive industry on the graph. (1 point)

l) Compare total economic surplus under perfect price discrimination to that under a perfectly competitive industry. (1 point)