Price Ceilings Assignment Worksheet
Directions
This assignment deals with the effects price ceilings imposed by the government.
To create the graph, or graphs, for this assignment, use the graphing tool that is provided with this activity. You can access the link within the courseroom. Copy and paste the graph you create into this worksheet.
To complete this assignment you need to finish all the following questions and activities.
Microeconomic Problem
In the 1970s, the United States experienced periods of severe gasoline shortages due to OPEC policy and unrest in the Middle East. The price of gasoline increased as a result of these shortages. In response, the federal government imposed a price ceiling on gasoline.
1. Construct a demand and supply diagram. Use a demand curve that you think reflects the normal short-run price elasticity of demand for gasoline and a supply curve that you think reflects the normal short-run price elasticity of supply of gasoline. That is, if you think the demand for gasoline is relatively inelastic, draw a relatively steep demand curve; and if you think the supply of gasoline is relatively inelastic, draw a relatively steep supply curve. Indicate an original equilibrium price and equilibrium quantity.
2. Construct a demand and supply diagram. Indicate an original EP and EQ.
3. Assume the government sets a price ceiling below the Pe. Plot this price ceiling price on your diagram. What is the new market situation? How will it be decided who can buy the quantity supplied of gasoline?
4. How has the price ceiling affected consumer surplus? Why did it have this effect?
5. How has the price ceiling affected producer surplus? Why did it have this effect?
6. Has a deadweight loss been created? Why? Does the price ceiling cause economic inefficiency?
7. How does the elasticity of supply and demand affect the price ceiling's affect on producer and consumer surpluses?
8. If the price ceiling were removed, what would happen to the price of gasoline in the near term? Is it fair that the available gasoline would only go to those people who are willing and able to pay the higher price? In being willing to pay more, does this mean that these people value gas more highly? What ideas of fairness presented in your text do you think apply in this case?
9. Why do you think there has been no suggestion of imposing a price ceiling on gasoline given current events in this market?