Answer to Question #144984 in Macroeconomics for peeriya darsinii ganesen

Question

a) Landlords show up at the next Council meeting and demand an increase in rents. The
Council members (concerned about their upcoming re-election campaigns) vote to repeal
the price ceiling and instead replace it with a price floor that is RM50 above the equilibrium
price. What is the new market price? How many two-bedroom apartments will be rented?

Answer 1

Without the intervention of politicians, the price of housing would adjust so that quantity demanded (Qd) would equal the quantity supplied (Qs) at equilibrium E0. However, changes in policies to keep the price high keeps the price (Pf) above what would be equilibrium level E0. The result of the price floor is that the quantity supplied (Qs) will exceed the quantity demanded (Qd) creating excess supply which is also called a surplus.

The new market price would be; Pf=P0+50 and the number of apartments to be rented would be Qs as indicated in the diagram.