Question

1. What are two economic arguments AGAINST legal rent controls to keep rents below the equilibrium amount?

2. Explain why "toothpicks" are so inelastic.

3. Airline travel is expensive. Then why is "airline travel, short run," so very inelastic? Why is "Airline travel, long run" so elastic?

4. Explain why "Legal services, short-run" are very expensive, yet are inelastic.

5. Explain why "Automobiles, long -run" are inelastic 0.2, but "Chevrolet or Ford or Toyota or other make of automobile" is very elastic (4.0).

6. Given: A company has 10 workers. The boss hires more and more and even more workers. Explain why the production will reach a point of diminishing marginal product.

7. Explain "Economies of Scale," "Constant Returns to Scale," and "Diseconomies of Scale."

Answer 1

1) Two economic arguments against rent control are

They reduce welfare and create inequality as the people who are able to procure the houses at low prices are better off while some of them are left homeless or without a place and hence it reduces welfare of these individuals.

Also the other reason is that rent control would reduce the overall flats to rent because of low prices and also the maintenance and quality of these apartments would reduce when the rent control continues for long, which might reduce the standard of living of the people.

2) Toothpick is inelastic because of several reasons:

The proportion of income spent on toothpick is less and hence the price increase would not make much difference

The price of toothpick is usually very less

There are less substitutes of toothpick.

3) Airlines in short run is inelastic because of time constraints, lack of substitutes to a particular route etc. In long run, there would be many substitutes, not just in airlines companies but also in other transport systems and hence it is elastic.

4) Legal services in short run are expensive yet inelastic because of time constraint. Usually legal services or advices are bound for a time period. Also these usually occur infrequently and hence they have an inelastic demand.

(You can comment for doubts)