MBAF504 Assignment #2: Elasticity, Supply, Demand and Government Policies: Price Ceilings (10%)

1. You have been given the following information about the housing market for two bedroom rental units in Vancouver:

RentQuantity DemandedQuantity Supplied

(dollars per month)(per month)(per month)

1,10020,0000

1,20015,000 5,000

1,30010,00010,000

1,400 5,00015,000

1,500 2,50020,000

1,600 1,50025,000

Hand draw a supply and demand graph to illustrate the housing market above.

Rental

price

1600supply

1500

1400

1300

1200

1100demand

5000 10000 15000 20000 250000

Quantity of housing

a)What is the equilibrium rental price? ___________1300_________

b)What is the equilibrium quantity of housing?_____10000_________________

2.Now suppose that a price ceiling of $1,200 rent per month is imposed in the Vancouver housing market described above in problem #1.

a)What is the new quantity of housing demanded? __________________

b)What is the quantity of housing that landlords would be willing to supply?____________

c)What is the excess quantity of housing demanded? _______________

3.In each of the following, compare the price elasticity of demand for each pair of goods. Explain why the demand for one of the goods is more elastic than the other:

a. ) A flat screen TVversus an ipod.

b. ) Electricity just after an increase in its price versus electricity two years after the price increase.

c. ) Medicine versus Tylenol brand acetaminophen.

d. ) Ipads when they first were produced versus Ipads two years from now.

4.If the price of good X is $4, the quantity demanded of good X is 40 units. When the price of good X is $2.50, the quantity demanded is 68 units.

A. Solve for the price elasticity

B. Interpret your results

C. Is this good elastic, inelastic, unit elastic, inferior, necessity, luxury?

5. Draw an inelastic (not a perfectly inelastic) demand curve. If a sales tax was added, who would pay the burden of the tax? Consumers or producers? Why? Explain.