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Competitive equilibrium between two gas stations

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The Hull Petroleum Company and Inverted V are retail gasoline franchises that compete in a local market to sell gasoline to consumers. Hull and Inverted V are located across the street from each other an can observe the prices posted on each other's marquees. Demand for gasoline in this market is Q=50-10P, and both franchises obtain gasoline from their supplier at \$1.25 per gallon. On the day that both franchises opened for business, each owner was observed changing the price of gasoline advertised on its marquee more than 10 times; the owner of Inverted V lowered its advertised price to beat Hull's price. Since then, prices appear to have stabilized. Under current conditions, how many gallons of gasoline are sold in the market, and at what price? Would your answer differ if Hull had service attendants available to fill consumer's tanks but Inverted V was only a self-service station? Explain.

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Solution Preview

Both firms want to maximize their profits. The profit-maximizing level of output in the market is where Marginal Revenue (MR) equals Marginal Cost (MC). We are told that MC = 1.25. To find MR, first we have to find Total Revenue (TR).

From the demand ...

Solution Summary

Calculating the equilibrium price and quantity for two profit-maximizing gas stations whose demand and cost curves are known.

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ECO212 Supply and Demand and Elasticity

1. If a 20% decrease in the price of long distance phone calls leads to a 35% increase in the quantity of calls demanded, we can conclude that the demand for phone calls is:
a. elastic.
b. inelastic.
c. unit elastic.
d. stretchy elastic.

2. Which of the following pairs are examples of substitutes?
a. Popcorn & Pepsi
b. Automobiles & Bicycles
c. Boats & Fishing Tackle
d. Wine & Cheese

3. When we say that a price in a competitive market is "too high to clear the market" we usually mean that (given upward-sloping supply curves).
a. no producer can cover the costs of production at that price
b. quantity supplied exceeds quantity demanded at that price
c. producers are leaving the industry
d. consumers are willing to buy all the units produced at that price

4. Which of the following statements is incorrect? Assume upward-sloping supply curves.
a. If the supply curve shifts left and the demand remains constant, equilibrium price will rise.
b. If the demand curve shifts left and the supply increase, equilibrium price will rise.
c. If the supply curve shifts right and the demand curve shifts left, equilibrium price will fall.
d. If the demand curve shifts right and the supply curve shifts left, price will rise.

Section Two: Short Answer (250 words or less)
1.Define "Elasticity of Demand". Give an example.

2.Define the "Law of diminishing Marginal utility". Give an example.

3.Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new Hybrid automobiles when the following occurs. Using graphs as we did in the notes we worked with in Week 1, describe the change in the equilibrium price and quantity, and explain your answer. Is the equilibrium price higher, lower, or is the change indeterminate? Is the equilibrium quantity higher, lower, or is the change indeterminate?

a.Incomes increase
b.Interest rates decrease
c.The price of batteries used in the production of these vehicles decreases.
d.The price of gasoline decreases

4.Determine if the demand for the following products is price elastic or price inelastic, and explain your answer.

a.Box of cereal sold in a grocery store
b.Gasoline as a commodity
c.Gasoline sold at a local gasoline station
d.Fast food sold at a restaurant
e.Hotel rooms for people planning a vacation
f.Hotel rooms for people on business to meet an important client
g.Clothes sold in a discount retailer

5.Name three types of market systems and give an example of each.

6.Define the "Law of Demand" and the "Law of Supply". Give an example for each.

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