Assume the demand curve for gasoline is given by the equation P = 10 - 0.0005Q,
where P is the price per gallon and Q is the quantity of gasoline in gallons. Assume that the only supplier of gasoline in the region is General Gasoline Co. and that the marginal cost of production is constant at zero.
a. If the company is currently charging $4 a gallon, is it maximizing profit? If so, prove it. If not, find out the price that maximizes its profit, and compare the profits at the two prices.
b. Discuss the likely effect of the introduction of a fuel-efficient car in the region; that is, what would happen to the equilibrium quantity. Show the changes on a graph that displays (you don't need to show actual numbers) General Gasoline's pricing solution and explain.