To reduce pollution, the California Air Resources Board requires that only reformulated gasoline be...

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To reduce pollution, the California Air Resources Board requires that only reformulated gasoline be sold in California. The cost functions of California firms (which produce reformulated gasoline) and firms in other states (which produce standard gasoline) are the same, except it costs non-California firms an additional $0.10 per unit to convert standard gasoline to the California version. (a) (3 points) Show a firm’s relevant short-run cost curves and derive the short run market supply curve of reformulated gasoline in California assuming the number of California firms is fixed. Assume that marginal cost is U-shaped and there is some fixed cost. (b) (2 points) Suppose the number of firms elsewhere is virtually unlimited and show the supply curve of regular gasoline adjusted to sell in California. (c) (2 points) Show the total short run supply curve in California. (d) (3 points) Now suppose that a series of disasters shut-down several of the California refineries substantially shifting the supply curve of gasoline for California firms. Show that the price increase cannot be more than 10 cents.

David · Accepted Answer

To reduce pollution, the California Air Resources Board requires that only reformulated gasoline 
be sold in California. The cost functions of California firms (which produce reformulated 
gasoline) and firms in other states (which produce standard gasoline) are the same, except it costs 
non-California firms an additional $0.10 per unit to convert standard gasoline to the California 
version.  
(a) (3 points) Show a firm’s relevant short-run cost curves and derive the short run market supply 
curve of reformulated gasoline in California assuming the number of California firms is fixed.

To reduce pollution, the California Air Resources Board requires that only reformulated gasoline be sold in California. The cost functions of California firms (which produce reformulated gasoline) and...

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