During the winter of 2004-2005, wholesale gasoline prices rose rapidly. Although retail gasoline prices increased, retailers' profit per gallon fell. The difference between price and average variable cost for selfserve regular gasoline averaged 7.7¢ a gallon in the first quarter of 2005 compared with 9.1¢ for all of 2004. In addition, many gasoline retailers exited the market. (Thaddeus Herrick, "Pumping Profits from Gas Sales Is Tough to Do," Wall Street Journal, May 25, 2005, B1).
a. Show how an increase in wholesale gasoline prices affects the individual retailer's marginal cost and supply curves.
b. Show how shifts in the individual retailer's supply curves affect the market supply curve.
c. Show and explain why an $x per gallon increase in wholesale gasoline prices results in a retail market price increase that is less than $x.
d. Identify the effect of wholesale gasoline price increases on the profit margins of an individual gasoline retailer.
e. Why has the increase in wholesale gasoline prices prompted many gasoline retailers to exit the market?