Suppose the Supply of Coal Is Perfectly Inelastic, and the Price

question 126

Multiple Choice

Suppose the supply of coal is perfectly inelastic, and the price elasticity of demand for coal is -0.4. If the government imposes a binding price ceiling for coal at a price that is 20 percent below the market equilibrium price, what is the impact of this policy on the market quantity?

• A) Excess demand equals 80 percent of the market equilibrium quantity.
• B) Excess demand equals 8 percent of the market equilibrium quantity.
• C) Excess demand equals 16 percent of the market equilibrium quantity.
• D) The policy does not affect the market quantity.

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Definitions:

Causal Effects

The relationship or impact that one variable has in directly changing the value or outcome of another variable.

Policy

A course or principle of action adopted or proposed by an organization or individual.

Causation

The relationship between cause and effect where one event directly results in another.

Correlated

Two variables are correlated if their values tend to move together.