Question 2: Homeowners near Middletown University\'s stadium used to rent parkin

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Question 2: Homeowners near Middletown University's stadium used to rent parking spaces in their driveways to fans at a going rate of $11. A new town ordinance now sets a maximum parking fee of $7 to allow more fans to attend sports games. This is represented on the diagram below: Parking fee $15 0 3,200 3,600 4,000 4,400 4,800 Quantity of parking spaces a). Given the new price of $7 some homeowners now think it's not worth the hassle to rent out spaces This will lead to a shortage ofparking spaces. b). The deadweight loss caused by a price ceiling of $7 is c). Friends of homeowners near the stadium regularly attend games, even if they aren't big fans. But some serious fans have given up because of the parking situation. This implies inefficient allocation of resources. True | 1or False l 1 (Please use (v) d). Some homeowners rent spaces for more than $7 but pretend that the buyers are non-paying friends or family. This implies that there is black market. True l 1or False | 1(Please use (vh e). Some fans arrive several hours early in order to find parking. This implies that there is waste of Jor False I 1 (Please use (V)) time (resource). True1

Explanation / Answer

a) Since the number of parking spots at $11 is 4000, and the number of spots at $7 is 3600, the shortage of parking spots= 4000-3600= 400 parking spots

b) The formula for deadweight loss: 0.5*(P2-P1)*(Q2-Q1)= 0.5*($7-$11)*(3600-4000)= 800

c) Provided that the friends of homeowners are paying the same parking fee, the answer is false. Since there is no change in the situation. Now this applies in a short run situation. If you consider long run, the serious fans who would regularly be attending the games, would eventually end up not going because of the lack of parking space. This would lead to lesser number of parking spots being occupied, which in that case, would make the statement, true. (Please clarify with your teacher whether they meant short run or long run)

d) True. The reason behind this is: when you have a price ceiling, there is a shortage of supply, which implies that consumers might move to alternative markets to gain access to the product. The basic characteristic of black market is: the price of the commodity is higher than the market price. Since some of the homeowners are renting it out at more than $7, that implies the consumer is reaching out to an alternative market to gain acess to the product/service. Hence, there exists a black market.

e) From a logical perspective, False. If the fans are paying $7 for the entire day, it does not matter whether they arrive at 2pm in the afternoon, or 6am in the morning. The fee is for 24 hours, according to the information provided. These types of questions are common to confuse the student, since common sense dictates it is a waste of time as a resource. However, unless there is any monetary or substitution cost involved, there is no wastage.

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