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.What will likely happen if no law against price gouging is enacted?

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.What will likely happen if no law against price gouging is enacted?

Quizplus · Accepted Answer

If no law against price gouging is enacted, outside sellers are likely to enter the market to take advantage of higher prices, increasing the supply and causing the price to fall.

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