Suppose that initially the gasoline market is in equilibrium, at a price of $2.50 per gallon and a quantity of 45 million gallons per month. Then a war in the Middle East disrupts imports of oil into the United States, shifting the supply curve for gasoline from S1 to S2. The price of gasoline begins to rise, and consumers protest. The federal government responds by setting a price ceiling of $2.50 per gallon. Use the graph to answer the following questions.

a. If there were no price ceiling, what would be the equilibrium price of gasoline, the quantity of gasoline demanded, and the quantity of gasoline supplied? Now assume that the price ceiling is imposed and that there is no black market in gasoline. What are the price of gasoline, the quantity of gasoline demanded, and the quantity of gasoline supplied? How large is the shortage of gasoline?
b. Assume that the price ceiling is imposed, and there is no black market in gasoline. Show on the graph the areas representing consumer surplus, producer surplus, and deadweight loss.
c. Now assume that there is a black market, and the price of gasoline rises to the maximum that consumers are willing to pay for the amount supplied by producers, at $2.50 per gallon. Show on the graph the areas representing producer surplus, consumer surplus, and deadweight loss.
d. Are consumers made better off with the price ceiling than without it? Briefly explain.

Transcribed Image Text:

Price (dollars per gallon) S2 $5.50 3.50 2.50 Quantity (millions of gallons per month) 30 40 45