Gasoline is sold through local gasoline stations under perfectly competitive conditions. All gasoline station owners face the same long-run average cost curve given by
AC = .01q – 1 + 100/q
and the same long-run marginal cost curve given by
MC = .02q – 1
Where q is the number of gallons sold per day.
a. Assuming the market is in long-run equilibrium, how much gasoline will each individual owner sell per day? What are the long-run average cost and marginal cost at this output level?
b. The market demand for gasoline is given by
QD = 2,500,000 – 500,000P
Where QD is the number of gallons demanded per day and P is the price per gallon. Given your answer to part a, what will be the price of gasoline in long-run equilibrium? How much gasoline will be demanded, and how many gas stations will there be?
c. Suppose that because of the development of solar-powered cars, the market demand for gasoline shifts inward to
QD = 2,000,000 – 1,000,000P
In long-run equilibrium, what will be the price of gasoline? How much total gasoline will be demanded, and how many gas stations will there be?