Suppose the price ceiling goes into effect in October. In December, it gets unusually cold and demand for natural gas increases (see image below). This increase in demand will cause
[ Select ]
excess demand to get smaller
excess demand to get larger
excess supply to get smaller
excess supply to get larger
. Due to the price ceiling, the price in the market remains unchanged. In the absence of the price ceiling, price would have
[ Select ]
risen
fallen
.

Question

Suppose the price ceiling goes into effect in October. In December, it gets unusually cold and demand for natural gas increases (see image below). This increase in demand will cause 
[ Select ]
excess demand to get smaller
excess demand to get larger
excess supply to get smaller
excess supply to get larger
 . Due to the price ceiling, the price in the market remains unchanged. In the absence of the price ceiling, price would have 
[ Select ]
risen
fallen
 .

BlackTom AI · Accepted Answer

The question describes a price ceiling implemented in October, followed by a December spike in demand for natural gas due to unusually cold weather. The first blank asks which outcome the increased demand will cause under the price ceiling, and the second blank asks what would have happened to price in the absence of the price ceiling.

Option 1 (for the first blank): ex cess demand to get larger. Think about it this way: a price ceiling keeps the price artificially low, which typically increases quantity demanded and reduces quantity supplied, creating a shortage. When demand rises (as in a colder December), the gap between quantity demanded and quantity supplied widens. That means excess demand becomes larger, not smaller, under the same ceiling.

Option 2 (for the first blank): ex cess demand to get smaller. This would imply the shortage shrinks as demand increases, which contradicts the effect of a binding price ceiling during a higher-demand period. With the price held at the ceiling, higher demand cannot be fully accommodated, so the shortage grows rather than shrinks.

Option 3 (for the first blank): ex cess supply to get smaller. Excess supply would occur if the price were above equilibrium, encouraging more supply than demand. A price ceiling skewing price downward tends to reduce supply relative to demand, not increase it, so this option is inconsistent with the scenario.

Option 4 (for the first blank): ex cess supply to get larger. This would require the price ceiling to drive producers to supply much more than consumers want, which does not happen when the market price is kept low; it actually tends to suppress supply while increasing demand, not raise excess supply.

Now, for the second blank, which considers the absence of the price ceiling:

Option A (for the second blank): risen. If the price ceiling were not in place, the higher demand from cold weather would push the market toward a higher equilibrium price. In other words, price would have risen under the free market conditions as consumers competed for a limited gas supply.

Option B (for the second blank): fallen. This contradicts basic supply and demand dynamics during higher demand; prices typically rise, not fall, when demand increases and supply is not perfectly elastic.

Option C (for the second blank): remain unchanged. With a genuine shock to demand in a competitive market, the price and quantity would adjust; a fixed ceiling prevents this natural adjustment, so assuming no ceiling the price would not stay unchanged.

Option D (for the second blank): become unpredictable. While some markets have unusual frictions, standard analysis links a higher demand shift to a higher equilibrium price, so saying price would become unpredictable is not the typical outcome in a simple supply-demand model without frictions.

In summary, the reasoning aligns with the interpretations that the increased demand under a binding price ceiling leads to a larger excess demand, and that without the ceiling, the price would have risen.

QAMO 2010-004 Fall 2025 Unit 9: Welfare Economics -- Application Problem

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