Question 3 (two parts) Part 1 The rent is a price ceiling, and there is a housin

Question

Question 3 (two parts)

Part 1

The rent is a price ceiling, and there is a housing surplus of 16.

The rent is a price floor, and there is a housing shortage of 16.

The rent is a price floor, and there is a housing shortage of 24.

The rent is a price ceiling, and there is a housing shortage of 16.

Part B

Using interpretation from Part A, Answer Part B - (Which of the following two statements best describes the outcome of such a rent?)

Those who are able to find housing are better off under rent control, and there is a deadweight loss of 6.

Those who supply housing are better off under rent control, and there is a deadweight loss of 64.

Those who are able to find housing are better off under rent control, and there is a deadweight loss of 64.

Those who supply housing are better off under rent control, and there is a deadweight loss of 6.

The rent is a price ceiling, and there is a housing surplus of 16.

The rent is a price floor, and there is a housing shortage of 16.

The rent is a price floor, and there is a housing shortage of 24.

The rent is a price ceiling, and there is a housing shortage of 16.

Explanation / Answer

d. The rent is a price ceiling, and there is a housing shortage of 16

Demand, P = 30 - Q

Supply, P = 2Q

At equilibrium demand = supply, 30 - Q = 2Q

Equilibrium Q = 30/3 = 10

Equilibrium P = 2x10 = 20

Price is less than the equilibrium price and it is a price ceiling which leads to a shortage.

At P = 16, Demand = 30 - 16 = 14

Deadweight loss = Area of a triangle whose base is a difference in demander's and seller's price and height is the difference in seller's quantity and equilibrium quantity.

At P 16, supply = 8 and at 8 units demand P = 30 - 8 = 22

DWL = 1/2 x (22-16) x (10 - 8)

DWL = 6

b. Those who are able to find housing are better off under rent control, and there is a deadweight loss of 6.

Those who supply housing are better off under rent control, and there is a deadweight loss of 6.

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