Jose owns a gas station and monopolizes gas sales along a remote stretch of road. In February, Jose stayed open even though he earned negative economic profits.
a. Draw a correctly labeled graph for Jose’s gas station during February and show each of the following.
i. The profit-maximizing output and price, labeled QJ and PJ
ii. The average total cost curve, labeled A TC
iii. Deadweight loss, completely shaded
b. What must have been true for Jose to continue operating during the month of February
even though he earned negative economic profit?
c. Assume that fixed costs for Jose’s gas station decrease. Would Jose’s profit-maximizing
quantity increase, decrease, or stay the same in February? Explain.
d. During the month of July, demand increases so that Jose now earns a positive economic
profit. However, he realizes his profits would have been higher if he had reduced the price of gasoline.
i. At the quantity sold in July, was marginal revenue greater than, equal to, or less than marginal cost?
ii. Would the price decrease cause quantity demanded to increase, decrease, or stay the same?
iii. Would the price decrease cause the total revenue to increase, decrease, or stay the same? Explain.
Sample Solution
