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Analysis Of Gasoline Market Equilibrium: Perfect Competition Vs. Monopoly

This Solved Assignment compares market structures and their impact on gasoline pricing. Download now for detailed insights!

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Analysis of Gasoline Market Equilibrium: Perfect Competition vs. MonopolySuppose that in a city there are 100 identical self-service gasoline stations selling the same type ofgasoline. The total daily market demand function for gasoline in the market is QD = 60,000-25,000P, where P is expressed in dollars per gallon. The daily market supply curve is QS=25,000P forP>$0.60. (a) Determine algebraically the equilibrium price and quantity of gasoline. (b) Draw a figureshowing the market supply curve and the market demand curve for gasoline, and the demand curveand the supply curve of one firm in the market on the assumption that the market is nearly perfectlycompetitve. (c) Explain whyyour figure of the market and the firm in part (b) is consistent. (d)Suppose that now the market is monopolized (e.g., a cartel is formed that determine the priceoutput as a monopolist would and allocates production equally to each member). Draw a figureshowing themonopolist’sequilibrium output and price. (e) How many gasoline stations would themonpolist operate? (f) Can we say that the monopoly leads to a less efficient use of resources thatperfect ompetition? What is the amount of the deadweight loss, if any?(a)The equilibrium price (Pe) is determined by solving : QD = QSThen 60000–25000P = 25000P then Pe = 60000/50000 = $1.2Therefore the equilibrium quantity Qe is : Qe = 25000Pe = 30000.(b)We plotted the quantity in function of the price. The green curve is the market demand curveand the red curve is the market supply curve.(c)A movement along the market supply curve means that the supply relationship remainsconsistent, and a movementalong the market demand curve means that the demandrelationship remains consistent : therefore the market is consistent.(d)In monopoly the equilibrium price and quantity are determined by setting the marginalrevenue equal to the marginal cost.

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Economics

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