Suppose the price of regular octane gasoline were 20 cents per gallon higher in New Jersey...
Suppose the price of regular octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma.
Do you think there would be an opportunity for arbitrage (i.e., that firms could buy gas in Oklahoma and then sell it at a profit in New Jersey)?
Why or why not?
Homework Answers
Solution -
they both cities represent different physical demand or we says marketing for gasoline because of very high cost of transportation.
Arbitrage opportunities will be available for transportation expenses Less than 20 cents per gallon. After that arbitrageurs could buy gasoline in Oklahoma and make money by transporting from new jersey to New Jersey. If traffic costs 20 cents or more, no arbitrage will be found.
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