The Hull Petroleum Company and Inverted V are retail gasoline franchises that co
ID: 1137274 • Letter: T
Question
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 and can observe the prices posted on each other’s marquees. Demand for gasoline in this market is Q = 60 -8P, and both franchises obtain gasoline from their supplier at $3.25 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 Hull lowered its price to slightly undercut Inverted V’s price, and 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? Instruction: Round your answer to the nearest two decimal places.
Gallons sold: _______
Price: $ _________
How would prices differ if Hull had service attendants available to fill consumers’ tanks but Inverted V was only a self-service station?
Price will go up.
Price will not change.
Price will go down.
Explanation / Answer
Q = 60 - 8P
MC is given as $ 3.25
This is an example of Bertrand competition where firm tries to undercut other by reducing price until it becomes equal to the MC.
P = MC
Substituting the value of P = $ 3.25 in demand function
Q = 60 - 8( 3.25)
= 60 - 26
= 34
Quantity = 34 units
P = $3.25
Hull has service attendant, hence its cost will increase. Increase in cost will lead to rise in price and fall in output. In Bertrand mode, if cost of one firm increases, then both firms tend to increase price.
Hence: Price will go up.
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