ECON 102 Lecture Notes - Lecture 11: Market Distortion, Price Controls
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Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.
Rent |
Demand |
Supply |
2,500.00 |
10,000 |
15,000 |
2,000.00 |
12,500 |
12,500 |
1,500.00 |
15,000 |
10,000 |
1,000.00 |
17,500 |
7,500 |
500.00 |
20,000 |
5,000 |
1. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?
2. If the local government can enforce a rent-control law that sets the maximum monthly rent at $1,500, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?
3. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $2,500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?
4. Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, by how many units of housing would the government have to increase the supply of housing to get the market equilibrium rental price to fall to $1500 per month? To $1000 per month? To $500 per month?
suppose that the demand and supply schedules for rental apartments in the city of gotham
Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.
Rent |
Demand |
Supply |
2,500.00 |
10000 |
15000 |
2,000.00 |
12500 |
12500 |
1,500.00 |
15000 |
10000 |
1,000.00 |
17500 |
7500 |
500.00 |
20000 |
5000 |
1.What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?
2.If the local government can enforce a rent-control law that sets the maximum monthly rent at $1500, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?
3.Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $2500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?
4.Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of the housing. Assuming that demand remains unchanged, by how many units of housing would the government have to increase the supply of housing in order to get the market equilibrium rental price to fall to $1500 per month? To $1000 per month? To $500 per month?
Question 1
During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?
$30 | ||
$35 | ||
$40 | ||
Indeterminant with the given information. |
2 points
Question 2
Which of the following is an example of a price floor?
A sale price with a limit on the quantity you can purchase. | ||
Rent-controlled apartments | ||
Predatory pricing designed to put a competitor out of business. | ||
The minimum wage |
2 points
Question 3
Airline regulation of the 1970s produced a similar result to which of the following government interventions?
The Affordable Care Act | ||
Minimum wage laws | ||
Rent control laws | ||
Communism |
2 points
Question 4
Which of the following is a possible effect of a price ceiling?
A surplus of the good. | ||
Increases in product quality. | ||
Increased gains from trade. | ||
People will waste time in lines waiting to purchase the good. |
2 points
Question 5
What is a price ceiling?
A minimum price consumers are willing to pay. | ||
A minimum price allowed by law. | ||
A maximum price allowed by law. | ||
A maximum price consumers are willing to pay. |
2 points
Question 6
Why are the long lines generated by a shortage worse than paying a higher price in money?
It is not better or worse. Paying in time and paying in money are essentially the same in a market economy. | ||
Paying with time reduces the value of money, and prevents valuable trades from occurring. | ||
Waiting in line is a waste of a valuable resource: time. Paying a price in money transfers the value of resources from one person to another, and maximizes the value of resources. | ||
Paying with time gives those who do not work an advantage over those who do. |
2 points
Question 7
Which of the following is a possible effect of a price floor?
The quantity supplied exceeds the quantity demanded. | ||
Increased gains from trade. | ||
Decreases in product quality. | ||
A shortage of the good. |