Question
Assume that the City Council in Prescott, Arizona is considering implementing price ceilings on rental units based on the number of bedrooms in the unit.
Assume that the City Council in Prescott, Arizona is considering implementing price ceilings on rental units based on the number of bedrooms in the unit. The demand function for rental units (on a single bedroom equivalent basis) is given by QD= 120 - 4P and the supply function is given by QS= 2P, where P is price and Q is quantity. The Council is considering imposing a ceiling price on rental units of Pmax= 16.
1) Are consumers of rental-housing in Prescott well-served by this price ceiling policy? Provide a careful economic analysis in support of your claim. In particular, discuss what happens if a regulated price is set that is not equal to the equilibrium price.
2) Suppose that the Council is concerned that landlords will allow the quality of their rental units to deteriorate following the imposition of the ceiling price. What can you infer about the level of quality that landlords' provision will allow if consumers are worse off, following the imposition of the ceiling price? Provide a careful economic analysis in support of your claim.In particular, discuss what happens if a regulated price is set that is not equal to the equilibrium price.
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