Answer to Question #119949 in Microeconomics for Chanveer Kaur

Question

Consider the market for rental housing in Yourtown. The demand and supply schedules for rental housing are given in the table.
Price
($ per month) Quantity Demanded (thousands of units) Quantity Supplied
(thousands of units)
1100 40 80
1000 50 77
900 60 73
800 70 70
700 80 67
600 90 65
500 100 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 marker? Explain your answer.
c. 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.
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. In a Free market for rental housing the equilibrium price and quantity are at Qd = Qs, so Q = 70, P = 800.

b. If the government in Yourtown decides to impose a ceiling on the monthly rental price, then the highest level at which such a ceiling could be set in order to have any effect on the marker is P = 500.

c. If the maximum rental price is set equal to $500 per month, then the quantity demanded is 100, the quantity supplied is 60, so there will be a shortage of 40 units.

d. If a black market develops in the presence of the rent controls in part (c), then the black market price that would exist if all of the quantity supplied were sold on the black market is 1100.