Question

1. Demand for gasoline in a small town is given by P=5-0.05Q where P is in dollars and Q is in 1000s of gallons per week. If there are only 3 gas stations in very close proximity to each other in the center of town, and consumers view them as perfect substitutes, answer the following questions:

a) If all firms share a constant MC=$2 per gallon, what will be the equilibrium price and quantity in the market?

b) Suppose that the three firms have slightly different MC, associated with the efficiency of their pumps. MC1=2, MC2=2.25, and MC3=2.25. What will be the equilibrium price and quantity in the market?

c) Suppose that the three firms have slightly different MC, associated with the efficiency of their pumps. MC1=2, MC2=2, and MC3=2.25. What will be the equilibrium price and quantity in the market?

Answer 1