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If the equilibrium price of gasoline is $3
If the equilibrium price of gasoline is $3.00 per gallon and the government will not allow oil companies to charge more than $2.00 per gallon of gasoline, which of the following will most likely happen?
a. The market will be in equilibrium at a price of $2.00.
b. Supply must eventually increase so that the market will come into equilibrium at a price of $2.00.
c. Demand must eventually decrease so that the market will come into equilibrium at a price of $2.00.
d. A nonprice rationing system such as ration coupons must be used to allocate the available supply of gasoline.
Expert Solution
The answer is b. Supply must eventually increase so that the market will come into equilibrium at a price of $2.00.
The market will not be at equilibrium if the price is fixed at $2.00 because demand will exceed supply under current conditions. Demand for fuel is unlikely to decrease since prices have been set lower. The cut in price will actually increase demand since the prices have been reduced. A nonprice rationing system would be unfeasible in a free market economy where gasoline is traded globally.
Oil manufactures will likely increase output of gasoline to meet the demand at a price of $2.00. This will be necessary to maximize profitability and to have the best chance of operating without loss. It may take time for output to increase and for actual usage to establish a new equilibrium point at $2.00.
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