Question

8. The figure below shows the market for rental units in Santa Monica, California. Rent (per period) Renta Renty Renta Rent, Rento O, O, O, O, Q4 Quantity of rental units (per period) According to the figure above, if the city of Santa Monica imposes rent control (a binding price ceiling) and sets the maximum no one will have to pay a higher actual price chan Rento, nor will anyone be willing to do so. some renters will be willing to pay a price as high as Rents for Qo units the shortage of rental units is the distance Q1-Q3. there will be a surplus of rental units.

Answer 1

Equilibrium rent is Rent2 (i.e., at the intersection point of demand and supply curve)

A price ceiling is said to be binding if it is set below the equilibrium price.

Since binding price ceiling sets at Rent0.

At binding price ceiling some renters will be willing to pay a price as high as Rent4 for Q0 units.

A binding price ceiling creates a shortage in the market.

At a price ceiling rent of Rent0, quantity demand is Q4 and quantity supplied is Q0.

Since,quantity demand is higher than the quantity supplied.

Shortage = Quantity demand - Quantity supplied

Shortage = Q4 - Q0.

Answer: Option (B) i.e., some renters will be willing to pay a price as high as Rent4 for Q0 units.