Hale's One Stop and Auto Service competes with Murray's Gas Mart. The local demand is: Qd = 25 - 10P ? P = 2.50 - 0.1 Qd. Both firms sell exactly the same quality of gasoline
Thus, if the firms charge a different price, the lower price firm will capture the entire market share. If the firms charge the same price, they will split the market share. The marginal cost functions are both constant at $1.25. If the firms compete by setting price, what is the market output level? What is the market price level?
If the firms compete by setting price, the equilibrium price will be $1.25 per unit. The market output level will be 12.5 units. If both firms attempt to price above $1.25, the firm with the lower price will enjoy the entire market share and earn an economic profit while the higher pricing firm sells no units of output. The higher price firm will have an incentive to undercut the price of the other firm. This behavior will continue until both firms charge $1.25. If the firms offer a price below $1.25, they will lose money and exit the industry or raise prices. Thus, equilibrium occurs where both firms charge $1.25 per unit.
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A unit tax placed on demanders causes the supply curve to shift downward, shifting part of the tax burden to supplier in the form of lower prices and quantity
a. True b. False
Which of the following is the best example of a normative economic statement?
a. A rise in gasoline prices will cause gasoline purchases to fall. b. The federal government should spend more on health care. c. Raising the minimum wage will result in greater unemployment. d. If more money is printed, then the economy's price level will rise.