Question

price (in $s) \D (0,0) 10 11 1 2 3 4 5 6 7 8 9 electricity (made up units)

Most people are unaware of electricity rate regulation because, most of the time, those price controls don't bind. For example, suppose that Figure B represents the market for electricity in California in 2001. During a typical Spring demand is at D₁, but following an unusually hot Summer demand shifts to D₂. Meanwhile, a price ceiling is in place at $4 per unit. By how much does the shortage (excess demand) increase following the shift in demand?

A. 0 units

B. 2 units

C. 5 units

D. 6 units

Answer 1

Demand curve shifts from D1 to D2.

At a price of $4, quantity supplied is 4 units and quantity demand on D2 is 9 units.

Shortage = Quantity demand - Quantity supplied

Shortage = 9 units - 4 units.

Shortage = 5 units.

Note; When Demand curve is D1, then there is no shortage at a price of$4. Shifts in demand curve from D1 to D2 leads to creates a shortage of 5 units at a price of $4.

Answer: Option (C).