Monopoly gas station
and is replicated here as part of the SERC Pedagogic Service.
Students predict the profit-maximizing price for gas at the one and only gas station in desert community. Then using data on demand and cost, they find the profit maximizing price and graph the result.
Context for Use
Students will be able to practice their skills and articulate their answers if they work in small groups of two to four. (For more on small group work see Starting Point Cooperative Learning module.)
Distribute the worksheets for the activity, making certain that the demand curve is on the second page, hidden from student view initially. Activity questions
Activity questions as pdf file (Acrobat (PDF) 32kB Aug15 12)
The demand curve
Demand curve as pdf file (Acrobat (PDF) 22kB Aug15 12)
Steps in the activity
1. Ask students (working in teams) to agree on three prices for consideration as the profit maximizing price.
2. Then students analyze profits at these three prices using the demand curve and filling out the worksheet
3. Students use 'guess and check' to find an even better price.
4. Students graph their results for the profit maximizing output and price.5. Students answer the follow up questions.
Teaching Notes and Tips
What if their initial price is greater than the highest price on the graph? Answer: consider lower prices. Why is this high price unlikely?
Why are only variable costs considered for the gas station? Answer: To make the problem easier to solve.
Can we use the MR = MC rule to find profit maximization? Answer: Yes, but difficult to do given the graph.
What is actual price of gas? Answer: depends on the current national market. Answer: It was $5 at the only gas station in a small town near Death Valley in 2011.
For later follow-up, ask students to compare monopoly pricing in this contestable market with prices in other types of monopoly.