Question

Can you explain them with rules

C 101 0412 vappx 7 Exercises III The equilibrium rent in a town is $500 per month and the equilibrium number of apartments is 100. The city now passes a rent control law that sets the maximum rent at $400. The diagram below summarizes the supply and demand for apartments in this city a) Use the figure to complete the table below Producer Sarplus Social Surplas ouse prscdelete sysrg 19 18 6 ox back

Answer 1

The price floor and price ceiling are the two controls by the government to control the unfairness in market price. A price floor is adopted in order to help the producers and a price ceiling is set by the government to protect the interest of the consumers. In both the case there will be greater efficiency or welfare loss in the economy.

Price ceiling is the maximum price the seller can charge above which the commodity cannot be sold. This price is often below the equilibrium price. Price floor is the minimum price below which a commodity cannot be sold. This price is often higher than the equilibrium price. A price floor leads to excess supply and this excess supply will buy by the government. A price ceiling leads to excess demand and the excess demand is met by the government by using its own buffer stock.

In the given figure the government fixes a maximum rent at $400. This is price ceiling and it is below the equilibrium price. Here the price ceiling increase the consumer surplus and decrease the producer’s surplus.

The consumer surplus is the difference between the price actually a consumer is willing to pay for a commodity and the price that actually paid by the consumer. The area below the demand curve and the price line is the consumer surplus.

The producer’s surplus is the difference between the price at which the producer is willing to supply and the price that the producer actually received from the sale of the product. The area above the supply curve and below the price line is the producer’s surplus.

Before the imposition of price ceiling i. e at the equilibrium condition of the market consumer surplus was equal to the area I and the producer’s surplus was equal to the area III. The imposition of price ceiling lowers the price to $400. The consumer’s surplus increase from I to III and producers surplus decrease from III to V. The area II and IV are the loss of satisfaction to the consumers and loss of satisfaction to producers from the fall in supply from 100 to 60 apartments. This is deadweight loss to the entire society.

Answer:

	Before rent control	After the rent control	Change
Consumer surplus	I	I & III	Surplus Increase from I to III
Producer’s surplus	III	Decrease to V	Surplus decrease from III to V
Social surplus	II & IV	Loss of social surplus equal to II & IV	The loss of social surplus equal to the area II and IV due to fall in supply from 100 to 60.