The retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $1.80 per gallon and total cost (TC) and marginal cost (MC) relations are:
TC = $40,000 + $1.64Q + $0.0000001Q2
MC =
TC/
Q = $1.64 + $0.0000002Q
and Q is gallons of gasoline. Total costs include a normal profit.
A. Using the firm’s marginal cost curve, calculate the profit-maximizing long-run supply curve for a typical retailer
B. Calculate the average total cost curve for a typical gasoline retailer, and verify that average total costs are less than price at the optimal activity level.