Question

Suppose the market for rental housing is

An increase in demand for rental housing will create a shortage of rental housing.

b. A rent control policy imposed below the equilibrium rent will create a shortage of rental housing.

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. For each of the following two statements explain whether the statement is true, false or uncertain.

Answer 1

a) An increase in demand for rental housing will create shortage of rental housing. This statement is false. If demand is more than supply this will lead to shortage.Increase in demand of rental housing will create shortage. But as per law of demand when demand exceeds supply price rises. So prices will rise and demand will fall. Both demand and supply will reach new equilibrium and thus there will be no shortage.

b. A rent control policy imposed below the equilibrium rent will create a shortage of rental housing.This statement is true. Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a “rent ceiling,” on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed.if rents are established at less than their equilibrium levels, the quantity demanded will necessarily exceed the amount supplied, and rent control will lead to a shortage of dwelling spaces.