Part II ShortAnswer Questions Please answer the following qu

Part II: Short-Answer Questions Please answer the following questions in the space provided. Show your work. 3. Two gas stations stand on opposite sides of the road: Rutter\'s Farm Store and Sheetz gas station. Rutter\'s doesn\'t even have to look across the highway to know when Sheetz changes its price for a gallon of gas. When Sheetz raises the price, Rutter\'s pumps are busy. When Sheetz lowers prices, there\'s not a car in sight. Both gas stations survive but each has no control over the price. 6a. In what type of market do these gas stations operate? Explain. 6b. What determines the price of gasoline from gasoline? 6c. Why does each of these gas stations have so little control over the price of the gasoline they sell?

Solution

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a) Both the gas stations exist in Perfect Competition market structure as they are selling the identical product. Also, they have no control over pricing as in anyone tries to change the price, it\'s demand is entirely affected. If Sheetz gas station raises the price, unlike a monopolistic competition where the entire demand doesn\'t die, in this case the demand falls to zero as product is identical.

b) The price is simply determined by the intersection of demand and supply of the gas at the gas stations. The equilibrium price is same for both of them as demand is highly price sensitive. To remain in business, they have to equate their price. If there is even a slight difference in the prices, the demand of the one with higher prices would fall entirely.

c) Both these gas stations have so little control or no control over price because of the simple reason that their products are identical and they are in geographical proximity. The equilibrium price is the one where both of them have equal prices. If one of them changes the price even slightly, then the demand gets entirely affected.