Suppose there is news that indicates that gasoline supplies might ...

[CORALGRILL2014]

Suppose there is news that indicates that gasoline supplies might suddenly become disrupted by a truckers' union strike.
 
  What would you expect would happen to the demand for gasoline in the present? How might consumers change their behavior and why? What impact would this news have on the price of gasoline immediately? Would it matter whether the news story was accurate?

Question 2

Assume a firm is operating under conditions of pure competition and faces a marginal cost function that is everywhere below its average total cost.
 
  If the firm is producing where marginal revenue equals marginal cost will it be possible for it to make an economic profit? Explain.

[jaykayy05]

Answer to Question 1

The expectations of a gasoline supply disruption might get consumers to keep their tanks full at all times. This tank topping behavior would artificially increase the demand for gasoline and would cause a price hike very shortly. It would not matter whether the news story was accurate but rather whether people thought it was credible.

Answer to Question 2

Since the firm is producing where marginal revenue equal marginal cost and marginal cost is below the average total cost then the firm will not be able to make an economic profit. The reason is that marginal revenue is equal to price under conditions of pure competition. Since the firm is producing where marginal revenue equal marginal cost that means that the price is also below the average total cost.

[CORALGRILL2014]

Correct answers!

[jaykayy05]

Great! Please up vote