Please answer the next two questions based upon the following information Sup po
ID: 1135028 • Letter: P
Question
Please answer the next two questions based upon the following information Sup pose an oil embargo results in a 25% decrease in the supply of gasoline in the U.S. Further suppose that the price elasticity of demand for gasoline is 50 and the pre embargo price for gasoline was $2.00. 35. The post embargo price for gasoline will be 36. Subsequent to the embargo, a government mandated maximum price of $3.25 will: a. result in a shortage of gasoline. b. result in long lines at gasoline stations c. likely result in something other than price performing the rationing function for gasoline. d. all of the above are correct e. none of the above is correct.Explanation / Answer
Q35
Answer
Price elasticity of demand=%change in quantity/%change in price
-0.5=-25/%change in price
%change in price=-25/(-0.5)
=50%
the price will increase by 50%
so the new price=2*(1.5)=$3
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Q36
Option c
The maximum price is $3.25 which is higher than the new equilibrium price so that will not have any effect on the market and the market will clear at price $3