šŸ·ļø LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION ā†’
Log in
Economics
1
answer
0
watching
262
views

Consider the demand for the gasoline sold by Gas Station G in a large city. The gasoline sold by other stations is an excellent substitute for the gasoline sold by Station G. Because there are many good substitutes for gasoline, its demand is probably elastic.

A. If the price at Gas Station G rises by 10%, by what percentage is its quantity sold likely to change, other things being the same?

B. In this case, what will happen to Station G'S revenues when the price rises?

C. Make a general statement about how revenues will change when the price rises or when it falls if demand is elastic and if it is inelastic.

D. It is often suggested that increasing gasoline taxes will reduce the number of gasoline people will buy and, as a result, reduce air pollution. In the short run would such a policy be effective in reducing air pollution? Would the policy be effective in reducing air pollution in the long run? Why?

Watch
1
answer
0
watching
262
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Yusra Anees
Yusra AneesLv10
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

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.Ā 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.Ā As he put it, "People think of gas stations as public mammary glands, but they're wrong.Ā 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".

The station owner was an avowed profit maximizer, albeit not a very attractive one. How did he profit from his dual-price policy? The answer is price discrimination. Although his costs varied little day and night, the elasticity of demand varied greatly. He maximized his profit by charging a higher price at night when demand is much more inelastic than during the day. In fact, we could go so far as to say that he operated under different market structures, day and night. At night, he appeared to have a pure local monopoly. Motorists desperate for gas had to drive miles to find another station open during those hours. Thus, the owner sold gas even at gouging prices. At those prices, the motorist may have preferred to buy five gallons rather than a full tank. During the day, he faced many competitors within blocks and numerous stations in neighboring Cambridge. That is, the market resembled monopolistic competition. There was some product differentiation due to locational convenience and brand allegiance. Nonetheless, in normal times excess profits are limited by the relatively free entry of new firms. (The gasoline crisis and accompanying supply shortage afforded sellers short-run, excess profits.)

A. Suppose that, during the day, the station owner's demand is given by PD = 2.06 - .00025QD. The marginal cost of selling gasoline is $1.31 per gallon. At his current $1.69 price, he sells 1,500 gallons per week. Is this price-output combination optimal? Explain.

B. The station owner sells an equal number of gallons at night, setting PN = $2.59. Suppose elasticity of demand is EP = -3. According to the optimal markup rule, is this price profit-maximizing?

Consider some determinants of the price elasticity of demand:

  • The availability of close substitutes
  • Whether the good is a necessity or a luxury
  • How broadly you define the market?
  • The time horizon being considered
Ā 

A good without any close substitutes is likely to have relatively ___________(inelastic/elastic) demand since consumers cannot easily switch to a substitute good if the price of the good rises.

A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

A. Diamond necklace

B. A heart value for heart attack victims

The price elasticity of demand for good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories Most Elastic In Between Least Elastic
Food Ā  Ā  Ā 
Red Bell Peppers Ā  Ā  Ā 
Vegetables Ā  Ā  Ā 
Ā 

The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the demand for gasoline is__________ (less, more, no more, nor less) elastic in the short run than in the long run.

Ā 

"Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar."

Can someone explain the following three questions?

1) How could we argue that these markets are not competitive?

a. Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.

b. The individual grocery stores or gas stations do not have the power to control the price of many items that they sell, so they are not able to compete on price.

c. They usually purchase products from the same distributor: i.e., all grocery stores and gas stations buy their Coke products from the same Coke distributor. Thus, individual grocery stores do not really compete with each other; the same for individual gas stations.

d. Each grocery store or gas station is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.

2) Could each firm face a demand curve that is not perfectly elastic?

a. No; since customers aren't willing to spend their morning visiting each grocery store or gas station in a large city to find the best deal, then each firm's demand curve will be perfectly elastic since consumers do not have full information.

b. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.

c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.

d. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.

3) How profitable do you expect grocery stores and gasoline stations to be in the long-run?

a. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.

b. Because of the rising prices of both food and gasoline, each of these industries is expected to suffer long-run losses for the foreseeable future.

c. Grocery stores would be expected to enjoy long-run positive profits since they sell a wider variety of products; gasoline stations would be expected to break even or take losses in the long run because of their more limited range of products.

d. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in