Suppose an oil embargo results in a 33% decrease in the supply of gasoline in th
ID: 2441211 • Letter: S
Question
Suppose an oil embargo results in a 33% decrease in the supply of gasoline in the U.S. Further suppose that the price elasticity of demand for gasoline is .75 and the pre embargo price for gasoline was $3.00.
36. The post embargo price for gasoline will be _____.
37. Subsequent to the embargo, a government-mandated maximum price of $4.50 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
Given that price elasticity is 0.75 and % fall in quantity is 33%. Then the % rise in the price is 33%/0.75 = 44%. Now price is 3.00 so post embargo price is 3*(1 + 44%) = 4.32
A government-mandated maximum price of $4.50 is higher than the new price of $4.32. Hence the mandated price will be ineffective as mandated price is more than market price which is not binding. e. none of the above is correct.