Question

Scenario 1:

The elected officials in a west coast university town are concerned about the "exploitative" rents being charged to college students. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the city. An economist at the university estimates the demand and supply curves as:

            QD = 5600 - 8P    QS = 500 + 4P,               

where P = monthly rent, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical.

Consider Scenario 1 in the Supplement. Which of the following would vote for this price ceiling to be imposed? (Mark all that apply)

		A. Owners of the apartment buildings
		B. Students who are able find an apartment to rent
		C. Students who are unable find an apartment to rent
		D. A citizen of the town who only cares about maximizing total welfare of both renters and apartment owners

Consider Scenario 1 in th Supplement. Which of the following things are likely to happen as a direct result of implementing the price ceiling? (mark all that apply)

		A. Downward pressure on price will likely push future rents below $350.
		B. Apartment building managers will allow units to deteriorate more quickly than before.
		C. There will be a shortage of apartments available for rent.
		D. Students living in apartments will become reluctant to move out of them.
		E. The supply of (still identical) apartments will increase to meet demand if a shortage does occur.

Answer 1

The equilibrium price in the market is where the demand and supply are equal. Here, Qd = 5600 -8P and supply = 500 +4P.

Equilibrium price will be $425.

a) "The Students who are unable to find an apartment to rent" and the students who already have an apartment are most likely to vote for the price ceiling. Because a rent ceiling will increase the welfare they are getting from the apartment.

(A price ceiling will reduce the return for the apartment owner so they will not vote, it will also cause a deadweight loss so, the people who want all to benefit will not vote for the rent ceiling )

b) "B" Apartment building managers will allow the units to deteriorate more quickly than before, "C" there will be a shortage of apartment available for rent and "D" Students living in the apartments will become reluctant to move out of them.

(Supply will reduce at a lower cost and there will be an upward pressure on the price.)