Suppose political unrest in a major oil producing country leads to a reduction in the supply of crude oil, a resource used to produce gasoline. If the government fixes the price of gasoline in order to prevent price gouging, which of the following will result?
a. The supply of gasoline will increase, because suppliers still need to sell gas.
b. The demand for gasoline will decrease, because consumers will curb consumption at the fixed price.
c. A shortage of gasoline will occur, because at the fixed price consumers will not have incentive to decrease consumption.
d. Everyone will be able to purchase the desired amount of gas, because at the fixed price both sellers and buyers will carry on business as usual.
Answer: c. A shortage of gasoline will occur, because at the fixed price consumers will not have incentive to decrease consumption.
Explanation: If the government fixes the price of gasoline in order to prevent price gouging, a shortage of gasoline will occur, because at the fixed price consumers will not have incentive to decrease consumption. As fixing a price ceiling results in supply exceeding demand, it leads to shortage.
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