When OPEC raised the price of crude oil in the 1970s, it caused a _______.
a. surplus of gasoline as the nonbinding price ceiling became binding
b. shortage of gasoline as the nonbinding price floor became binding
c. surplus of gasoline as the nonbinding price floor became binding
d. shortage of gasoline as the nonbinding price ceiling became binding
The correct answer and explanation is:
The correct answer is d. shortage of gasoline as the nonbinding price ceiling became binding.
In the 1970s, OPEC (Organization of Petroleum Exporting Countries) raised the price of crude oil, which had a significant impact on the supply of gasoline. Gasoline is derived from crude oil, so when the price of crude oil increases, the cost of producing gasoline also increases. If a government or regulatory body has imposed a price ceiling on gasoline (which means that gasoline cannot be sold above a certain price), this price ceiling could become binding.
A nonbinding price ceiling means the ceiling is set above the market equilibrium price, so it does not interfere with market transactions. However, when the price of crude oil rises, gasoline suppliers might need to increase their prices to cover the higher production costs. If the price ceiling is below the new equilibrium price (which is now higher due to the rise in crude oil prices), the ceiling becomes binding. This leads to a situation where the price is artificially kept lower than it should be, causing the quantity demanded for gasoline to increase while the quantity supplied decreases.
The result of this imbalance between supply and demand is a shortage of gasoline. Consumers want more gasoline at the artificially lower price, but suppliers are less willing or able to provide gasoline at that price, given the higher costs of crude oil. As a result, there is not enough gasoline to meet demand, which leads to long lines at gas stations and rationing in some cases.
Thus, the increase in crude oil prices, combined with a binding price ceiling on gasoline, caused a shortage of gasoline in the 1970s.