Assume a price floor is imposed in the wheat market at the equilibrium price and

Question

Assume a price floor is imposed in the wheat market at the equilibrium price and that a price ceiling is imposed in the gasoline market at the equilibrium price. An increase in supply in both the wheat and gasoline markets will create: A. surpluses in both the wheat and gasoline markets. B. shortages in both the wheat and gasoline markets. C. a surplus in the wheat market and an increase the quantity of gasoline traded. D. a surplus in the wheat market and a shortage in the gasoline market. E. a shortage in the wheat market and a surplus in the gasoline market.

Explanation / Answer

D. a surplus in the wheat market and a shortage in the gasoline market

A price floor can be set below the free-market equilibrium price. In the first graph at right, the dashed green line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price

similar opposite effect for price ceiling

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