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. PRICE IRubles per capl 50 40 20 10 10 20 40 50 QUANTITY (Millions of caps per month 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 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 per month, which is of the mandated production level, leading to caps per month. Suppose that next year the govemment mandates a production of 15 million caps per month. True or False: If the government sets a price that causes a shortage, producers will likely sell caps illegally at a price below the price set by the govemment. O False True Consider the ongoing economic transitions of Cuba, China, and Russia. In the table, match the economic change to the country it best describes Experienced large increases in prices at the beginning of transition Started transitioning in the early 1990s Allows private enterprise, but only on a very limited basis