Question

4. Price controls in a command economy Suppose the following graph depicts the market for Fidel Castro-style caps in the Soviet Union, which was a command economy. The vertical supply curve reflects the central planners' mandated level of total production, 25 million caps per month. Supply PRICE (Rubles per cap) Demand 0 Ft 0 5 10 15 20 25 30 35 40 QUANTITY (Millions of cans per month) 45 50

Answer 1

When there is a surplus in the market, then it means that price set in the market is higher than the consumer willing to pay. It caused price to decrease. If it does not decrease, then producers will illegally sell the products at a lower price.

If the central planners mandate the production of 25 million caps per month, but allow the market to determine the price, the price of a cap will be 15 Rubles Now suppose the central planners mandate the production of 25 million caps and fix the price at 5 rubles per cap, as represented by the horizontal tan drop line (dash symbol) in the graph. At 5 rubles per cap, the quantity of caps demanded is 35 million capsper month, which is More than the mandated production level, leading to shortage of of 10 Million caps per month. Suppose that next year the government mandates a production of 15 million caps per month. True or False: If the government sets a price that causes a surplus, producers will likely sell caps illegally at a price below the price set by the government. O True O False