Question 4. The Economic Analysis of Price Controls (25 marks)

Solve the following problem. Show your work step by step. Keep your explanations short and concise

The demand and supply for rental apartments (assume they all look the same) in a city are given by:

D: Q^D = 2400 - 1.2P

S: Q^S = -600 + 0.8P

a)Find the market equilibrium price and the number of the apartments that will be rented at this price. (4 marks)

b)Draw the demand and supply diagram including the vertical intercepts of each curve. (4 marks)

c)Calculate the consumer surplus, producer surplus and total surplus in this market and explain in your own words the meaning of each of them. (6 marks)

The city mayor is worried that rents have increased too much and housing is becoming unaffordable. They consider introducing a cap on the rent landlords could charge equal to $1200.

d)What is the name of this type of price control in economics?Show the price control on your previous diagram. How does it affect the number of apartments rented in this market? (2 marks)

e)Based on your intuition (no calculation yet), who do you think will benefit and who do you think will be hurt by this type of price control? Explain. (1 marks)

f)Calculate the new consumer surplus, producer surplus and total surplus in this market after the rent is being capped and compare them to the values from part (c). Do your results confirm your intuition from part (e)? Explain.(3 mark)

g)Is the society overall better off with rent capped at $1200? Is there any deadweight loss? If there is, show it on your graph, calculate it and explain what it represents.(2 marks)

h)What do you think will be the effects of rent control in the long run? Will landlords get used to it or will things get worse?(1 mark)

i)If you were the mayor's economic advisor, would you advise for or against the rent control? Why or why not?(1 mark)

Suggest a different measure that the mayor could use to help low-income families with their housing needs and explain how it would help these families.