Question

Situation 4-1

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. If no price controls had been in place, the effect of the oil embargo on the equilibrium price and quantity of gasoline would have been

a)an increase in both price and quantity.

b)an increase in price and a decrease in quantity.

c)a decrease in price and an increase in quantity.

d)a decrease in both price and quantity.

Answer 1

Answer: B: an increase in price and a decrease in quantity

Step-by-step explanation:

Embargo means that the countries who imposed the oil embargo won't trade oil with the West. This means that the supple will contract in the west (lower supply of oil). Since, there is less oil available and same amount of oil is demanded, this will create shortage. Thus, the price will increase and quantity will decrease.