Question

1. You are a policy maker and you are given a proposal to add a rental price ceiling of C on the rental price of apartments in DC.
   1. Define price ceiling.
   2. Show the initial equilibrium price and quantity and the new equilibrium price and quantity. Explain.
   3. Is there a shortage or surplus of apartments? How do you know?
   4. What happens to consumer surplus, producer surplus, and DWL?
   5. As a policy maker, do you think rental price ceilings are a good idea? Explain why or why not using the outcomes you found.

Answer 1

a) Price ceiling refers to the maximum price charged for a given good or service.To be effective,a price ceiling has to be imposed below the equilibrium price in the market.

b)

Consider the diagram above

Initial equilibrium price = P

Initial equilibrium quantity = Q

Price ceiling = PC is the new equilibrium price imposed in the market

It will decrease the equilibrium quantity to QS as this is the quantity that the producers are willing to sell in the market now due to the price ceiling.

c) The quantity demanded will increase as the price decreases to QD so there is a shortage of QD-QS units in the market

d) Initial CS = AEP

New CS = AGCPC

Initial PS = PED

New PS = DCPC

DWL before = 0

DWL after = GEC

e) No, the rental price ceiling is not a good idea as it reduces the equilibrium quantity and will lead to a black market. Also, the quality of rental units offered will go down in the market and less maintenance will be provided. Before it, the market was efficient but after it, there is an inefficiency in the market and a shortage of rental units occurs,