Assume the demand curve for gasoline is given by the following equation:

P = 10

-

0.

0

005 Q, where P is the price per gallon and Q is t

he 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, i.e. what

would happen to the equilibrium quantity. Show the ch

anges on a graph that displays (you

don't need to show actual numbers) General Gasoline's pricing solution and explain.