Question

Graph the following scenarios, using the Supply and Demand model. 1. The market for apartment rental units in Austin: Suppose there is a set number of apartment units in the city that cannot be changed, and the government helps people pay for renting apartment units. 2. The market for cigarettes where the government imposes a consumer tax, but also helps cigarette producers pay for their costs of production.

Answer 1

1) If there is fixed number of apartments which cannot be changed which means aggregate supply of apartments cannot be chaned. Government helps people for paying apartment rent which will lower the cost of living in apartments and raise aggregate demand of apartment. It will shift demand curve to its right from AD to AD1 which will raise price of aprtment from P to P1 and raise quantity traded from Y to Y1.

2) The market for cigarettes: Government impse tax on consumers which will raise its price for consumers which will induce them to consume less. It shift demand curve to its left from AD to AD1. On the other hand, producers get help from government to pay for their cost of production which will raise aggregate supply of cigarettes and shift supply curve to its right from SRAS to SRAS1. It will lower the price from P* to P2 while keep the output at same.