Answer to Question #47811 in Microeconomics for Yoyo

Question

Suppose the supply and demand curves for rental housing in Ontario are given by: Qs = –100 + 5P Qd = 600 – 2P
where Qs and Qd are quantities and P is the price (rent).
(a) Calculate the equilibrium price and quantity in this market. Graph the demand and supply curves and
illustrate your equilibrium point.
(b) Suppose the government institutes rent control in this market such that rents are limited to 75. What effect does this have on the market? In particular, what is the quantity of rental housing traded on the market and is there a shortage of rental housing created by this policy? Calculate and illustrate your answers.
(c) Does this policy lead to deadweight loss in the rental housing market? If so, illustrate it in your diagram.
(d) Explain why this policy might lead to illegal trades in the market, that is, trades at prices above those specified by the law.

Answer 1

Qs = –100 + 5P, Qd = 600 – 2P
(a) The market is in equilibrium, when Qd = Qs, so:
-100 + 5P = 600 - 2P
7P = 700
Pe = $100
Qe = -100 + 5*100 = 400 units.
(b) If the government institutes rent control in this market such that rents are limited to 75, the demand will excess supply, so there will be shortage. Qd = 600 - 2*75 = 450, Qs = -100 + 5*75 = 275, so there will be shortage of 450 - 275 = 175 units.
(c) This policy leads to deadweight loss in the rental housing market, because equilibrium is broken.
(d) This policy might lead to illegal trades in the market at prices above those specified by the law, because the suppliers can't satisfy all the demand for such a low price, so some of them trying to earn more will trade illegally.