Question

After an earthquake disrupts the supply of clean drinking water to many residents of a city, the city restricts grocery stores from raising the prices they charge for bottled water. If no side markets arise, which of the following statements is true?

1) The law restricting a price increase will exacerbate the water shortage (or "excess demand").
2) Water will be allocated to the consumers with the highest willingness to pay for it.
3) Water will be allocated to the consumers who need it most.

Answer 1

Answer:

1. The law restricting a price increase will exacerbate the water shortage (or “excess demand”).

Explanation:

Some residents might be able to limit their water consumption and would purchase less water if prices rose. If prices are kept low, the quantity of water demanded will be very high, creating more of a water shortage.