1. Currently, Texas Tea Oil Co. is the only local supplier of home heating oil in Frigid, Alaska. This winter residents were shocked that the price of a gallon of heating oil had doubled and believed that they were the victims of market power. Explain which of the following pieces of evidence support or contradict that conclusion.
There is a national shortage of heating oil, and Texas Tea could procure only a limited amount.
This does not support the conclusion. Texas Tea has a limited amount of oil, and the price has risen in order to equalize supply and demand.
Last year, Texas Tea and several other competing local oil-supply firms merged into a single firm.
This supports the conclusion because the market for home heating oil has become monopolized, and a monopolist will reduce the quantity supplied and raise price to generate profit.
The cost to Texas Tea of purchasing heating oil from refineries has gone up significantly.
This does not support the conclusion. Texas Tea has raised its price to consumers because the price of its input, home heating oil, has increased.
Recently, some nonlocal firms have begun to offer heating oil to Texas Tea’s regular customers at a price much lower than Texas Tea’s.
This supports the conclusion. The fact that other firms have begun to supply heating oil at a lower price implies that Texas Tea must have earned sufficient profits to attract the others to Frigid.
Texas Tea has acquired an exclusive government license to draw oil from the only heating oil pipeline in the state.
This supports the conclusion. It indicates that Texas Tea enjoys a barrier to entry because it controls access to the only Alaskan heating oil pipeline.