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= 80-12 and both franchises obtain gasoline from their supplier at $410 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? Instructions: Enter your responses rounded to the nearest two decimal places Gallons sold: Price: $

Answer 1

Answer:

I believe that the demand equation is incomplete, since there is no price (P).

If we just solve this equation like it is, the quantity demanded = 80 - 12 = 68 gallons

if we add the price into the equation:

Q = 80 - 12P

since this is a competitive market, in order to maximize profits, marginal revenue = marginal cost = $4.10 per gallon (not $410).

That means that both companies will sell gasoline at $4.10 per gallon

equilibrium quantity = 80 - (12 x 4.10) = 30.8 gallons of gasoline