2. The rent control agency in Bucharest has found that the demand for apartments is Qg = 320 — 16P. Quantity is measured in tens of thousands of apartments. Price, the average monthly rental rate, is measured in hundreds of Euros. The agency also noted that the increase in Q at lower P results in more three-person families coming into the city and demanding apartments. The city’s board of realtors acknowledges that this is a good estimate of demand and has shown that supply is Q, = 140 + 14P.

(a) If both the agency and the board are right about demand and supply, what is the free market price? What would be the change in the population of the city if the agency sets a maximum average monthly rental in Euros, and all those families who cannot find an apartment leave?

(b) Suppose the agency bows to the wishes of the board and sets a rental rate of 1800 per month on all apartments to allow landlords a "fair" rate return. If 50% of any long-run increase in apartment comes from new construction, how many apartments are constructed? Suppose that a government argues that it can increase revenue from a particular sector by actually lowering tax rates. Choose a constant excise (specific) tax, and show a case in which this is possible. Would it make a difference if demand is elastic or inelastic? The city council of a small college town decides to regulate rents in the town order to reduce student living expenses.