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. Before the oil embargo, the price ceiling on gasoline had no noticeable effect on the market. What is the most likely explanation for this?

a)The equilibrium price of gasoline was probably below the price ceiling.

b)The demand curve for gasoline in the 1970s was vertical.

a)The equilibrium price of gasoline was probably below the price ceiling.

Explanation:

Price ceilings take place when the government imposes a maximum selling price for a good. While price floors take place when government imposes a minimum selling price for a good. In order for any of them to be able to cause any type of effect, or even be noticed, they must actually influence the sales price. E.g. the price ceiling must be lower than the market price of gasoline. Imagine the market price of gasoline is $4 per gallon and a price ceiling of $10 per gallon is imposed. It would actually have no effect at all. In this same situation, if hte government instead established a price floor of $2 per gallon, it would also make no effect at all since the market price was already higher.

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