Concept: Price Controls

Suppose that this diagram shows the retail market for gasoline. Use a copy of this diagram to answer the following questions. Be sure to illustrate your answer in your diagram, and to provide a brief written explanation as well.

1. What are the equilibrium price and quantity in the market?

2. Suppose that the government decided that the market price was too high, and so imposed a ceiling price of $1.25 per gallon. What would be the quantity demanded at that ceiling price? What would be the quantity supplied?

3. What quantity of gasoline would actually be exchanged at the ceiling price?