Question

The demand schedule given below is for the market for gasoline in a town. The marginal cost of supplying gasoline is constant at $2 per gallon. Assume that there are no fixed costs. part a: If the market is competitive what will be the price charged for a gallon of gasoline and what will be the gas stations economic profits? part b: If there is only one gas station in town what price will it charge and what will be its profits? part c: What would be the socially efficient quantity of gasoline (assuming there are no externalities)? (Ctrl) - Price QUATTILY $1.80 900 gallons $2.00 880 gallons $2.20 850 gallons $2.40 800 gallons $2.60 740 gallons $2.80 650 gallons $3.00 500 gallons IF

Answer 1

a)

The competitive equilibrium occurs at P=MC. Because the firms are competitive and take price as given. Then in a competitive market

• P=$2.00
• Q=880 gallon
• Profit =0

b)

If the firm is the only firm in the market, then it has monopoly power. This implies that the firm maximizes profit at MR>=MC and set price for the profit maximizing quantity from the demand curve. The marginal revenue for the monopolist is given in the table below

P	Q	TR	MR
1.8	900	1620
2	880	1760	7.0
2.2	850	1870	3.7
2.4	800	1920	1.0
2.6	740	1924	0.1
2.8	650	1820	-1.2
3	500	1500	-2.1

From the table the MR>= MC is valid up to 850 gallon. Then the firm at monopoly equilibrium set

• P=$2.20
• Q=850 gallon
• Profit= ($2.2-$2)*850=$170

c)

The most efficient outcome occurs at the competitive market where the marginal cost of last unit sold is equal to the marginal benefit of last unit consumed. The marginal benefit is the price from the demand schedule. Then the efficient criteria is P=MC. Therefore, at efficient outcome

• P=$2.00
• Q=880 gallon
• Profit =0