In Winona, a gallon of gasoline at Kwik trip sells for $2.279. In the east end o

Question

In Winona, a gallon of gasoline at Kwik trip sells for $2.279.   In the east end of Rochester, Kwik trip sells gasoline for $2.179 per gallon.   At the west end of Rochester, the same gallon of gasoline at Kwik trip sells for $2.129.     Rochester has about 5 times as many residents and about 5 times as many gas stations as Winona.

    A gallon of Kwik trip gasoline in La Crosse, Wisconsin sells for $2.349.   Lacrosse is similar in size to Rochester, MN in terms of population and gas stations.

     In the US, the federal excise tax on gasoline is 18.4 cents per gallon. The gasoline excise tax in Minnesota is 27.2 cents and in Wisconsin it is 32.9 cents per gallon.

1. (5 points) Assume that the wholesale price of gasoline (i.e. the price paid by gas stations for their gasoline) is the same for all Kwik trip stations in Rochester.    Using demand and supply curves, explain the price differential between the two ends of Rochester.     Is this due primarily to demand or supply? Explain.

2. (5 points)   Assume that the wholesale price of gasoline (i.e. the price paid by gas stations for their gasoline) is the same for all Kwik trip stations in southern Minnesota.   Using demand and supply curves, explain the price differential between the Rochester and Winona   Is this due primarily to demand or supply? Explain.

3. (5 points) Assume that the wholesale price of gasoline (i.e. the price paid by gas stations for their gasoline) is the same for all Kwik trip stations.    Using demand and supply curves, explain the price differential between the Rochester and La Crosse.   Is this due primarily to demand or supply? Explain.

4. (10 points) In which town do the customers appear more sensitive to the price of gasoline, La Crosse or Rochester? Explain.

Explanation / Answer

1.

The price differential, as shown in above figure, is due to demand.

2.

The price differential is again due to demand. A higher number of residents does not imply a higher demand.

3.

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