Mr. Jones always buys gasoline at the corner station with his credit card. Now a new station (that does not accept credit cards) is built on the other corner and offers the same quality of gasoline for $.05 less per gallon. Is Jones irrational if he continues to buy gasoline at the old station

Question

Business

Charlize Hill

24 February, 16:57

Mr. Jones always buys gasoline at the corner station with his credit card. Now a new station (that does not accept credit cards) is built on the other corner and offers the same quality of gasoline for $.05 less per gallon. Is Jones irrational if he continues to buy gasoline at the old station

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Answers (1)

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Emilia Chan · Answer 1

Answer: B. Not necessarily; he may think the ease and convenience of using the credit card is worth the extra cost.

Explanation:

Rationally speaking, human beings as market participants have to obey the law of Demand which states that As the price of a good rises, the demand should fall and vice versa.

Now, the price of the new station is less than that of the old station so rationally speaking, he should switch to the New station.

However, they do not take credit cards at the new station and Mr Jones likes to pay with his credit card. This means that the law of Demand is not necessarily violated here if Mr. Jones believes that the convenience of using his card is an extra cost that can be added to the New station. Should this be the case then the new station might still be more expensive to Mr. Jones so the Law of Demand is not broken if he keeps using the old place.