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Joe Ferris owns Joe's Gas-and-Go service station. Joe reads a newspaper article in which an economist describes the demand for gasoline as price inelastic. Remembering
- Joe Ferris owns Joe's Gas-and-Go service station. Joe reads a newspaper article in which an economist describes the demand for gasoline as price inelastic. Remembering his principles of economics course from college, Joe comes to the following conclusion: "Because the demand for gasoline is inelastic, if I increase the price I charge, I will lose a few customers, but the price increase will more than compensate for the fact that I will be selling a smaller quantity of gasoline. Therefore, the revenue I earn from gasoline sales will increase." Briefly explain whether you agree with Joe's reasoning.
- Suppose that initially the only sellers of gasoline in a town are conventional service stations. Then Wal-Mart and Sam's Club decide to begin selling gasoline. They install service islands near their stores and sell gasoline for lower prices than the conventional services stations. What effect do these new gasoline sellers have on revenue and profits received by the conventional service stations?
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