Scenario: The figure on the left shows the demand for fuel by Lisa and Nick during ordinary times. Assume that Lisa and Nick are the only consumers. In the figure on the right, D₀ is the market demand, and S₀ is the supply in ordinary times in the town. Then a hurricane hits the town. The acute needs for fuel to operate electric generators pushes the demand to D₁. Meanwhile, the supply plummets to S₁ because some of the fuel storage tanks owned by the town seller have been damaged by the storm. This pushes the price up to $5 per liter and only Lisa can afford some fuel. Suppose that fuel sellers outside the affected area have a cost of production such that MC = ATC at $2.50 per liter, which includes the cost of transporting the fuel under hazardous conditions.

-Refer to the scenario above.Nick complains to the town council of price gouging by the fuel sellers.In response,an anti-price-gouging law is immediately passed that puts the price ceiling at $1.75 per liter.What will likely happen next?
A) Neither Lisa nor Nick will be able to obtain the fuel.
B) Both Lisa and Nick will be able to obtain the fuel.
C) Lisa can, but Nick still would not be able to obtain the fuel.
D) Nick can obtain the fuel, but Lisa will be priced out.

Question

Scenario: The figure on the left shows the demand for fuel by Lisa and Nick during ordinary times. Assume that Lisa and Nick are the only consumers. In the figure on the right, D₀ is the market demand, and S₀ is the supply in ordinary times in the town. Then a hurricane hits the town. The acute needs for fuel to operate electric generators pushes the demand to D₁. Meanwhile, the supply plummets to S₁ because some of the fuel storage tanks owned by the town seller have been damaged by the storm. This pushes the price up to $5 per liter and only Lisa can afford some fuel. Suppose that fuel sellers outside the affected area have a cost of production such that MC = ATC at $2.50 per liter, which includes the cost of transporting the fuel under hazardous conditions.
 
-Refer to the scenario above.Nick complains to the town council of price gouging by the fuel sellers.In response,an anti-price-gouging law is immediately passed that puts the price ceiling at $1.75 per liter.What will likely happen next?
A) Neither Lisa nor Nick will be able to obtain the fuel. 
B) Both Lisa and Nick will be able to obtain the fuel. 
C) Lisa can, but Nick still would not be able to obtain the fuel. 
D) Nick can obtain the fuel, but Lisa will be priced out.

Quizplus · Accepted Answer

A price ceiling of $1.75 per liter is below the equilibrium price of $5 per liter during the hurricane, which means that the quantity demanded will exceed the quantity supplied. Therefore, fuel shortages will occur, and neither Lisa nor Nick will be able to obtain the fuel at the ceiling price. Fuel sellers will likely prioritize customers who have urgent needs or are willing to pay a higher price through black markets, which may worsen the shortages and encourage hoarding. Alternatively, fuel sellers may reduce the quality of the fuel or reduce their supply further to avoid losses, which may lead to longer-term damages to the generators and other engines that rely on the fuel. Therefore, a price ceiling may have unintended consequences that worsen the situation.

Scenario: the Figure on the Left Shows the Demand for Fuel