Question

Consider the market for rental housing in Yourtown. The demand and supply schedules for rental housing are given in the table. Quantity Demanded (thousands of units) 40 50 60 70 80 90 100 Quantity Supplied (thousands of units) 80 Price (S per month) 1100 1000 900 800 700 600 500 73 70 67 65 60 a. In a free market for rental housing, what is the equilibrium price and quantity? b. Now suppose the government in Yourtown decides to impose a ceiling on the monthly rental price. What is the highest level at which such a ceiling could be set in order to have any effect on the mar- ket? Explain your answer. Suppose the maximum rental price is set equal to $500 per month. Describe the effect on quantity demanded, supplied, and exchanged in the rental-housing market. c. d. Suppose a black market develops in the presence of the rent controls in part (c). What is the black- market price that would exist if all of the quantity supplied were sold on the black market?

Answer 1

a) At equilibrium, Quantity demanded is equal to quantity supplied. This happens at price equal to 800. Therefore Equilibrium Price = 800 Equilibrium Quantity = 70,000 b) The highest level at which a price ceiling could be set is 800. For a price ceiling to be effective, it should be below equilibrium price. c) At price = 500, quantity demanded is 100,000 & quantity supplied is 60,000. Thus after price ceiling quantity demanded increases & quantity supplied decreases, and quantity exchanged is 60,000. d) For black market price Price consumers are willing to pay for 6000 quantity supplied is 900. Black market price = 900.