Question

Figure 1. Market for Rental Apartments in Alpha City $2,000 Supply $1,800 $1,600+ $1,400 + $1,200 + MONTHLY RENT $1,0 +---- $800 $600 $400+ Demand $200 + 0 200 400 600 800 1,000 QUANTITY 1,200 1,400 1,600 1,800 2,000

Answer 1

The rent control law fixes the maximum amount of rent that can be charged from the tenants by the land lords. In the above case, the equilibrium price of rental apartments is equal to $1000. Let us assume that the government fixes the rent at $700. At this level, the consumer, producer surplus and deadweight loss are depcied by the following:

a. Consumer Surplus : It represents the area between the price line and demand curve. Given, the diagram above, value of consumer surplus = A + B + C. This is because at price = $700, the quantity of housing rentals is fixed at 700 units.

b. Producer Surplus: Given the minimum amount of rent = $700, the producer surplus = D.

c. Deadweight Loss - Since area E + F is not accounted in consumer and producer surplus, thus area E + F represents deadweight loss due to minimum rent.