The year is 1779 ?in Iceland. Light sources, such as oil lamps, are precious commodities (as harnessed electricity is not yet available). ?The government wants to intervene in the pricing of oil lamps so that its citizens do not pay outrageous amounts of money for lighting. The currency used in Iceland at the time is the rigsdaler. Consider the graph depicting Iceland’s hypothetical supply and demand for oil lamps.
If Iceland’s governor chooses to set a price floor of 15 ?rigsdaler for an oil lamp, what will occur?
The equilibrium price of an oil lamp will change.
There will be a shortage of oil lamps.
Nothing will change.
There will be a surplus of oil lamps.
The correct answer and explanation is:
The correct answer is:
There will be a surplus of oil lamps.
Explanation:
A price floor is a government-imposed minimum price that must be paid for a good or service. In this case, the Icelandic governor sets a price floor of 15 rigsdaler for oil lamps. To analyze its impact, we need to compare this floor price with the market equilibrium price.
- Understanding Market Equilibrium:
- In a free market, the equilibrium price is the price at which the quantity of oil lamps demanded by consumers equals the quantity supplied by producers.
- If the price is too high, consumers will buy fewer lamps, leading to excess supply.
- If the price is too low, consumers will buy more lamps than are available, leading to a shortage.
- Impact of the Price Floor:
- If the price floor is set above the equilibrium price, it means that oil lamps are now more expensive than they would naturally be in the market.
- At this higher price, producers are willing to supply more lamps, anticipating higher profits.
- However, consumers will demand fewer lamps, as the price is too high for many people to afford.
- This mismatch between high supply and low demand leads to a surplus—more lamps remain unsold.
- Consequences of the Surplus:
- Sellers may struggle to sell their oil lamps at 15 rigsdaler.
- Some merchants may lower prices illegally (black market).
- The government might need to intervene further, either by purchasing excess oil lamps or subsidizing consumers.
Since a price floor causes quantity supplied to exceed quantity demanded, the result is a surplus of oil lamps in Iceland.
Now, I will generate an image depicting this scenario.
Here is the generated image depicting a historical Icelandic marketplace in 1779, showing a surplus of oil lamps due to government-imposed price controls. Let me know if you need any modifications or further explanations!
