Marginal benefit and marginal cost | Managerial Economics

HSM 450 

University of Rochester/The Simon Business School

Managerial Economics and Organizational Architecture

Seventh Edition

Publisher: McGraw Hill

By James A. Brickey/Clifford W. Smith/Jerold L. Zimmerman

Chapter 2 Economist’s View of Behavior

On a recent trip passing through the Cattaraugus Indian reservation an observer noted several gas stations selling gasoline 30¢ per gallon cheaper than in Buffalo, NY and its suburbs (the reservation is approximately 30 miles south of Buffalo, NY; 16 miles from the nearest suburbs of Buffalo). The observer also noticed a surprising number of RVs and trucks pulling boats at these gas stations. Please use concepts discussed in class to explain why the Indian-owned gas stations would price 30¢ lower than competitors (rather than a smaller price differential) and why a larger proportion of customers would be driving RVs or towing boats. Note: The gasoline sold on the reservation is indistinguishable from gasoline sold elsewhere (i.e., there is no quality difference).