AlphaGas is a retail station which sells gasoline to consumers at the per-gallon price Pr. It is the only gasoline station in town. Inverse demand for gasoline from retail customers is Pr = 20-2Q¹. AlphaGas purchases gasoline from the local refiner, OmegaGas, at the per-gallon wholesale price of PW. Denote the quantity of wholesale gasoline sold to AlphaGas as QW. This is AlphaGas' only input, and its production function is given by Q=f(Q")=Qw. The cost function is therefore given by C(Q¹)=PW Qr. (a) Find the level of production, Q¹, that maximizes the profits of AlphaGas. (b) Use your answer from (a) to form the demand curve for OmegaGas. (c) Suppose that Omega's cost of refining is $4 per gallon. Using your answer from (b) to find the level of production that maximizes Omega's profits. What price will it set?

AlphaGas is a retail station which sells gasoline to consumers at the per-gallon price Pr. It is the only gasoline station in town. Inverse demand for gasoline from retail customers is Pr = 20-2Q¹. AlphaGas purchases gasoline from the local refiner, OmegaGas, at the per-gallon wholesale price of PW. Denote the quantity of wholesale gasoline sold to AlphaGas as QW. This is AlphaGas' only input, and its production function is given by Q=f(Q")=Qw. The cost function is therefore given by C(Q¹)=PW Qr. (a) Find the level of production, Q¹, that maximizes the profits of AlphaGas. (b) Use your answer from (a) to form the demand curve for OmegaGas. (c) Suppose that Omega's cost of refining is $4 per gallon. Using your answer from (b) to find the level of production that maximizes Omega's profits. What price will it set?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter11: Price And Output Determination: Monopoly And Dominant Firms

Section: Chapter Questions

Problem 6E

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