Situation 4-1 During the winter of 1973-74, a general system of wage and price controls (including a price ceiling on gasoline)was in force in the United States. At the beginning of 1974, some oil-producing countries imposed an oil embargo (a legal prohibition on commerce)on the West. In the spring of 1974, price controls were abolished.
Refer to Situation 4-1. Before the oil embargo, the price ceiling on gasoline had no noticeable effect on the market. What is the most likely explanation for this?
A)The equilibrium price of gasoline was probably below the price ceiling.
B)The demand curve for gasoline in the 1970s was vertical.
C)The supply curve for gasoline in the 1970s was vertical.
D)The equilibrium price of gasoline was probably above the price ceiling.

Question

Quizplus · Accepted Answer

If the equilibrium price of gasoline was above the price ceiling, then the price ceiling would have had an effect on the market by causing a shortage. If the demand curve for gasoline was vertical, then any change in price would not affect the quantity demanded, which is not consistent with the observation that the price ceiling had no noticeable effect. Similarly, if the supply curve for gasoline was vertical and the equilibrium price was above the price ceiling, then the price ceiling would have caused a shortage. Therefore, the most likely explanation is that the equilibrium price of gasoline was below the price ceiling.

Situation 4-1 During the Winter of 1973-74, a General System