Question

Exercise 2: Price Ceilings-Rent Control 1. Let's say a nice one-bedroom apartment in your town has a market rent of $1,000. At that price, 20,000 units are available for rent in your town. Please construct a market model for this rental housing using the information. Remember, the demanders are tenants and the suppliers are landlords. 2. Next, impose a price ceiling of $750.00 for all one-bedroom apartments in the market. Don't worry too much about exact numbers in the model; are there more or less units available after the rent control? Why? 3. What are some of the possible outcomes from the governmental price ceiling?

Thank you for your help.

Answer 1

The required graph is below: Rent 1000 20,000 Quantity $1000 is the equilibrium market rent and 20,000 is the equilibrium quantity of rental housing supplied and demanded at this price. Rent 1000 750 Qs 20,000 Qd Quantity

When rental price falls to $750, quantity demanded (Qd) exceeds quantity supplied (Qs), leading to a shortage of housing in the market. Shortage = Qd - Qs This is because at a lower rent, more people will be willing to demand housing than people who will be willing to supply houses for rents (as their rental income would fall) Possible outcomes: Shortage of housing Possibility of black marketing of houses Black market price of housing would increase People looking for houses would have to pay more than the initial equilibrium rent, in order to get a house now Thus, imposing the price ceiling seems to be a bad idea for the economy.