Question: At Boston area service stations, the elasticity of the demand for gasoline with respect to price (combining the pure price effect with the effect on waiting lines) was -3.3, the elasticity with respect to the station fueling capacity was 0.7 and the elasticity with respect to the average price nearby stations was 1.2.

1. Explain why the elasticity with respect to the average price at nearby stations is a positive number.
2. Amy’s station is the only competitor to Al’s. Al’s station has 3% more fueling capacity. Originally both stations charged the same prices. They Amy reduced her price by 2%. What will be the percentage difference in the quantity demanded between the 2 stations?
3. If Amy raises capacity from 6 to 7 fueling places, by how much could she increase price without affecting sales?

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