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Price Gouging and Profit Maximizing

Looking for intelligent responses to these 3 questions. Perhaps a mathematical explanation in combination with a paragraph each.

In 1981, a Boston-based gas station owner set the highest gasoline prices in the nation.

During that summer, he charged $1.69 per gallon for unleaded gas during the daytime and $2.59 per gallon at night, when other downtown gas stations were closed. (His all-time high price was $3.99.)

Even at these extreme prices; however, the station owner sold an average of 3,000 gallons per week, half of this at night.

Despite catcalls, pickets, and even vandalism from angry motorists during the gasoline crisis, the owner "stuck by his pumps"; he even charged $1 for air.

As he put it, "People think of gas stations as public mammary glands, but they're wrong. This is a business and it's important to generate profits from every part of it. If I can use a resource, like air, to pay for the electric bill, so much the better. If you allow capitalism in its true form, it works beautifully."

1. Would you identify his actions as price gauging or was the station owner an avowed profit maximizer?

2. How did he profit by his dual-price policy?

3. Why did his competitors not participate in such action?

Solution Preview

He was an avowed price maximizer because he maximized his profits by charging higher prices at night when the demand was inelastic and people were forced to pay higher prices due to lack of any alternative. Hence, he acted like a smart businessman and seized the opportunity ...

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