Question

1. Suppose that the market inverse demand and supply schedules for rental apartments in the city of Auckland are as given by the following equations: Demand:

P = 2700 – 0.12Q_D

Supply: P = –300 + 0.12Q_S

1. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied? Show on graph   
2. If the local authority can enforce a rent-control law that sets the maximum monthly rent at $900, will there be a surplus or a shortage? Of how many units will this be? And how many units will actually be rented each month? Show on graph   

III. Suppose that the government decides to implement a policy to keep out the poor. It declares that the minimum rent that can be charged is $1,500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units will this be? And how many units will actually be rented each month?       

    

Answer 1

I.

$\dpi{80} \fn_phv Q_D=\frac{2700-P}{0.12}, Q_S=\frac{P+300}{0.12}$

The following diagram represents the market:

5000 5000 15000 25000 30000 10000 20000

Market equilibrium price is 1200, equilibrium quantity is 12500.

II.

For P = 900,

$\dpi{80} \fn_phv Q_D=15,000, Q_S=10,000$

There is an excess demand of 5,000 units. Equilibrium quantity is 10,000 units.

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III.

For P = 1500,

$\dpi{80} \fn_phv Q_D=10,000, Q_S=15,000$

There is shortage of demand of 5000 units. Equilibrium quantity is 10,000 units.

2000 2000 4000 16000 8000 10000 12000 14000 18000 20000 6000 22000