4. (35 points) Because rents were high, a city implemented rent control. The supply of rentals is given by q = 2p while demand is q = 8, 000 8p, where p is the rental price. The authorities made it illegal to rent an apartment for more than $500 per week.

(a) (3 points) Without rent control, what is the equilibrium quantity and price?

(b) (7 points) With rent control, what is the equilibrium quantity and price?

c) (4 points) The concept of excess demand describes a situation where more people demand a product at a given price than what is supplied. In a market without price controls, what is excess demand?

(d) (4 points) What is excess demand with rent control? (e) (3 points) In a market with excess demand, how would the market allocate rental units, i.e. how do we decide which people will get the rental units?

(f) (10 points) Lets say the government decided instead to offer a price subsidy of $200 to owners who rented. Solve for the equilibrium price and quantity in this case. Note that you need to solve for 2 prices: the price suppliers receive and the price renters pay.

(g) (4 points) A lot of people in Santa Cruz feel that rents are too high and the government should intervene to solve the problem. Based on this problem, do you think rent 2 control is a good solution? Note there is no right or wrong answer, you just have to argue your answer well using economic logic. Under what conditions would rent control be more beneficial to renters?

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