Answer to Question #21150 in Microeconomics for DK

Question

2. The rent control agency of Pittsburgh has found that the aggregate demand is QD = 160 – 8P. Quantity is measured in tens of thousands apartments. Price, the average monthly rental rate, is measured in hundreds of dollars. The agency also noted that the increase in Q at lower P results from more three-person families coming into the city from outlying areas and demanding apartments. The city’s board of realtors acknowledges that this is a good demand estimate and has shown that supply is QS = 70 + 7P.

a. If both the agency and the board are right about demand and supply, what is the free-market price? What is the change in city population if the agency sets a maximum average monthly rent of $300 and all those who cannot find an apartment leave the city?

b. Suppose the agency bows to the wishes of the board and sets a rental of $900 per month on all apartments to allow landlords a “fair” rate of return. If 50 percent of any long-run increases in apartment offerings comes from new construction, how many apartments are constructed?