Question

Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.

Monthly Rent $: 3,000 2,500 2,000 1,500 1,000

Apartments Demanded: 10,000 12,500 15,000 17,500 20,000

Apartments Supplied: 15,000 12,500 10,000 7,500 5,000

a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?

Market equilibrium rental price is: _____ (per month). Market equilibrium quantity is:_____ (apartments).

b. If the local government can enforce a rent-control law that sets the maximum monthly rent at $2,000, will there be a surplus or a shortage? Of how many units?___(aparments per month).    How many units will actually be rented each month? _____ (apartments)
c. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $3,000 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? _____ (aparments per month)

Answer 1

(a)

Market equilibrium rental price is determined by equality of demand and supply of apartments. Hence Market equilibrium rental price is:$2500 (per month).

Market equilibrium quantity is12,500 (apartments).

This is because at rental price of $2500, the quantity demand and supply of apartment are equal.

b.

If government imposes a price ceiling of $2,000 per month, then there will be shortage of apartment because demand is greater than supply at Rent of $2,000.

The shortage of room will be=15000-10,000

=5,000 apartments.

The actual amount of apartment which are rented out will be 10,000 apartments.

c. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $3,000 per month. If the government can enforce that price floor, then there will be a surplus. This is because at price floor of $3000 rent per month, the supply is greater than the demand of apartment.

The surplus quantity of apartment at price floor of $3,000 per month will be= 15,000-10,000

=5000 unit of apartments per month