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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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