Consider a perfectly competitive local market for retail gasoline fuel in Ontario for which the demand...

Consider a perfectly competitive local market for retail gasoline fuel in Ontario for which the demand side comprises 30,000 vehicles. Each gasoline firm in the market has an annual long-run total cost function of

{ ??(?) = ? + 0.62? + (?^2 / 125,000,000) ?? ? > 0

??(?) = 0 ?? ? = 0

where ? is fixed cost and ? is firm-level output in litres of gasoline retailed per year. Each firm owns a single facility (i.e. gas station), hires a manager and retains insurance, which are the only fixed factors of production. A gas station (land, building, siteworks and equipment) is a $2,000,000 capital investment that is financed by shareholders whom are able to earn an annual rate of return of 6.5% on investments elsewhere. A manager’s salary and benefits are $60,000 per year and the cost of insurance is $10,000 per year. The annual demand for gasoline in the market is given by ?(?) = 100,000,000 − 50,000,000? where ? is the price per litre. Let ? = ?? denote industry level output where ? is the number of firms operating in the market

Expert Solution

Rahul Sunny answered 7 months ago

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