Question

1. Hank Hill sells propane gas in a competitive market. He reads an article that indicates...

1. Hank Hill sells propane gas in a competitive market. He reads an article that indicates that the price
elasticity of demand for propane across the US is inelastic. He immediately raises his price as a result of this
information. First, why would Hank do this and, second, why will he be very disappointed as a result

Homework Answers

Answer #1

ANSWER:-

  • The market is competitive, that is all the firms are price takers and sell at a compatitive price which is same across all sellers.
  • The demand being inelastic means that a change in price will have no or less than percentage effect on the quantity demanded.
  • Hanks raised the price after observing the elasticity assuming that an increase in price will not affect his demand.

He is wrong as the market is competitive and all firms are selling same propane at a lower price now than Hanks. The result will be consumers will shift to other sellers with lower price. A rational consumer will buy the same quality propane from a seller with lower price. The market is so single seller cannot affect the market price.

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