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. If no price controls had been in place, the effect of the oil embargo on the equilibrium price and quantity of gasoline would have been
A)an increase in both price and quantity.
B)an increase in price and a decrease in quantity.
C)a decrease in price and an increase in quantity.
D)a decrease in both price and quantity.

Question

Quizplus · Accepted Answer

In the absence of price controls, the oil embargo would have caused a decrease in the supply of oil, shifting the supply curve to the left. This would lead to an increase in the equilibrium price and a decrease in the equilibrium quantity of gasoline. Therefore, option B is the correct answer.

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