2 Double marginalization AlphaGas is a monopoly retail station that charges a per-gallon price of P r. Inverse demand for gasoline from retail customers is Pr = 20–2Qr. AlphaGas purchases gasoline from the local refiner, OmegaGas, at the per-gallon wholesale price of Pw. This is AlphaGas' only input, and and its cost function is therefore C(Qr) = PwQr. a. Find the level of production, Qr, that maximizes the profits of AlphaGas. This forms the demand curve for OmegaGas, a monopoly supplier. b. Suppose that Omega's cost of refining is $4 per gallon. Using your answer from (a) to find the level of production that maximizes Omega's profits. What price will it set? c. Combine your answers from (a) and (b) to find a value for Qr. What will be Pr? d. What are the combined profits of Alpha and Omega? What is consumer surplus? e. Suppose Omega acquired Alpha, forming a coming company called Omega Alpha. What is its profit maximizing quantity and price? What are profits, and what will consumer surplus be in this case? f. How do your answers to (d) and (e) compare and why?

2 Double marginalization AlphaGas is a monopoly retail station that charges a per-gallon price of P r. Inverse demand for gasoline from retail customers is Pr = 20–2Qr. AlphaGas purchases gasoline from the local refiner, OmegaGas, at the per-gallon wholesale price of Pw. This is AlphaGas' only input, and and its cost function is therefore C(Qr) = PwQr. a. Find the level of production, Qr, that maximizes the profits of AlphaGas. This forms the demand curve for OmegaGas, a monopoly supplier. b. Suppose that Omega's cost of refining is $4 per gallon. Using your answer from (a) to find the level of production that maximizes Omega's profits. What price will it set? c. Combine your answers from (a) and (b) to find a value for Qr. What will be Pr? d. What are the combined profits of Alpha and Omega? What is consumer surplus? e. Suppose Omega acquired Alpha, forming a coming company called Omega Alpha. What is its profit maximizing quantity and price? What are profits, and what will consumer surplus be in this case? f. How do your answers to (d) and (e) compare and why?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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You have 5 kids and work 2 jobs to help support your family. You work a day job from 8:00 am to 4:00 pm Monday through Friday. You also cut hair at one of the local barber shops on Saturdays and Sundays. On Saturdays you normally work from 7:00 am to 7:00 pm and make pretty good money because the shop is always full on the weekends. Your wife is concerned that you are not spending enough time with the children because you work all of the time. Using production possibilities analysis, show a situation where you decide to increase the amount of time on Saturdays that you hang out with the kids from 2 to 5 hours.
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