During the winter of 2004–2005, wholesale gasoline prices rose rapidly. Although retail gasoline prices increased, retailers’ profit per gallon fell. The difference between price and average variable cost for selfserve regular gasoline averaged 7.7¢ a gallon in the first quarter of 2005 compared with 9.1¢ for all of 2004. In addition, many gasoline retailers exited the market. (Thaddeus Herrick, “Pumping Profits from Gas Sales Is Tough to Do,” Wall Street Journal, May 25, 2005, B1).

a. Show how an increase in wholesale gasoline prices affects the individual retailer’s marginal cost and supply curves.

b. Show how shifts in the individual retailer’s supply curves affect the market supply curve.

c. Show and explain why an $x per gallon increase in wholesale gasoline prices results in a retail market price increase that is less than $x.

d. Identify the effect of wholesale gasoline price increases on the profit margins of an individual gasoline retailer.

e. Why has the increase in wholesale gasoline prices prompted many gasoline retailers to exit the market?

The African country Lesotho gains most of its export earnings—90% in 2004—from its garment and textile factories. Your t-shirts from Wal-Mart and fleece sweats from J. C. Penney probably were made there. In 2005, the demand curve for Lesotho products shifted down precipitously due to increased Chinese supply with the end of textile quotas on China and the resulting increase in Chinese exports and the plunge of the U.S. dollar exchange rate against its currency. Lesotho’s garment factories had to sell roughly $55 worth of clothing in the United States to cover a factory worker’s monthly wage in 2002, but they had to sell an average of $109 to $115 in 2005. Consequently, in the first quarter of 2005, 6 of Lesotho’s 50 clothes factories shut down, as the world price plummeted below their minimum average variable cost. These shutdowns eliminated 5,800 of the 50,000 garment jobs. Layoffs at other factories have eliminated another 6,000. Since 2002, Lesotho has lost an estimated 30,000 textile jobs.

a. What is the shape of the demand curve facing Lesotho textile factories, and why? (Hint: They are price takers in the world market.)

b. Use figures to show how the increase in Chinese exports affected the demand curve the Lesotho factories face.

c. Discuss how the change in the exchange rate affected their demand curve and explain why.

d. Use figures to explain why the factories have temporarily or permanently shut down. How does a factory decide whether to shut down temporarily or permanently?