Assume a price floor is imposed in the wheat market at the equilibrium price, and that a price ceiling is imposed in the gasoline market at the equilibrium price. What will an increase in supply in both the wheat and gasoline markets create?

Question

Quizplus · Accepted Answer

A price floor set at the equilibrium price in the wheat market will not initially create a surplus. However, an increase in supply, with the price unable to fall due to the price floor, will lead to a surplus because the price cannot adjust downward to clear the market. In the gasoline market, a price ceiling set at the equilibrium price will not initially create a shortage. However, an increase in supply will not create a shortage; instead, it will increase the quantity of gasoline traded because the market can absorb the extra supply at the equilibrium price, assuming demand remains constant or increases.

Assume a Price Floor Is Imposed in the Wheat Market