Price controls in a command economy Suppose the following graph depicts the market for Che Guevara T-shirts in the Soviet Union, which was a command economy. The vertical supply curve reflects the central planners' mandated level of total production, 50 m on T-shirts per month 100 T Supply 90 80 E 70 H 60 t 50 40 30 20 10 Demand 10 20 30 40 50 60 70 80 90 100 QUANTITY (Millions of T-shirts per month)
If the central planners mandate the production of 50 million T-shirts per month, but allow the market to determine the price, the price of a T-shirt will be ( 10 rubles / 20 rubles/ 30 rubles/ 40 rubles ) .
Now suppose the central planners mandate the production of 50 million T-shirts and fix the price at 10 rubles per T-shirt, as represented by the horizontal tan drop line (dash symbol) in the graph. At 10 rubles per T-shirt, the quantity of T-shirts demanded is (30 / 40 / 50 / 60 / 70 million) per month, which is ( equal to /less than / greater than ) the mandated production level, leading to ( an equilibrium quantity / a shortage / a surplus) of (10 / 20 / 30 / 40 / 50 / 60/70 million) T-shirts per month.
Suppose that next year the government mandates a production of 30 million T-shirts per month.
True or False: If the government sets a price that causes a shortage, producers will likely sell T-shirts illegally at a price above the price set by the government.
O False
O True
