Question

Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?

Short answer

The outcome is that the demand for gasoline would rise as a result of the lower price since people would want to buy more because it is "affordable."

Step-by-step solution

Definition

Price ceiling is an upper limit on the price of a product imposed by a central authority such as government to protect the consumers in the market.

Explanation

If the government decides to officially cap gasoline prices at $1.30 per gallon, there will be a gasoline shortage. This is because $1.30 is less than $1.40, which is the equilibrium price. The decreased price would increase demand for gasoline, as consumers would want to buy more because it is "reasonable."

The quantity supplied, however, would be lower at this price level. This difference in quantity demanded and quantity supplied would create a shortage.