KW_Macro_Ch_04_End_of_Chapter_Problems

KW_Macro_Ch_04_End_o - chapter 4 > The Market Strikes Back PROBLEMS 1 Suppose it is decided that rent control in New York City will be abolished

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>> The Market Strikes Back chapter 4 1. Suppose it is decided that rent control in New York City will be abolished and that mar- ket rents will now prevail. Assume that all rental units are identical and are therefore offered at the same rent. To address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low-income households equal to the difference between the old controlled rent and the new market rent. a. Use a diagram to show the effect on the rental market of the elimination of rent con- trol. What will happen to the quality and quantity of rental housing supplied? b. Now use a second diagram to show the additional effect of the income-supplement policy on the market. What effect does it have on the market rent and quantity of rental housing supplied in comparison to your answers to part a? c. Are tenants better or worse off as a result of these policies? Are landlords better or worse off? d. From a political standpoint, why do you think cities have been more likely to resort to rent control rather than a policy of income supplements to help low-income people pay for housing? PROBLEMS
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2 CHAPTER 4 PROBLEMS 2. In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and there- fore cost the same. The accompanying table shows the demand and supply schedules for taxi rides. a. Assume that there are no restrictions on the number of taxi rides that can be supplied in the city (i.e., there is no medallion system). Find the equilibrium price and quantity. b. Suppose that the mayor sets the maximum price at $5.50. How large is the shortage of rides? Illustrate with a diagram. Who loses and who benefits from this policy? c. Suppose that the stock market crashes and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. What effect will the mayor’s new policy have now? Illustrate with a diagram. d. Suppose that the stock market rises and the demand for taxi rides returns to normal (that is, returns to the demand schedule given in the table). The mayor now decides to ingratiate himself with taxi drivers. He announces a policy in which operating licenses are given to existing taxi drivers; the number of licenses is restricted such that only 10 million rides per year can be given. Illustrate the effect of this policy on the market, and indicate the resulting price and quantity transacted. What is the quota rent per ride? $7.00 10 12 6.50 11 11 6.00 12 10 5.50 13 9 5.00 14 8 4.50 15 7 Quantity of rides (millions per year) Fare (per ride) Quantity demanded Quantity supplied
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3. In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price.
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_04_End_o - chapter 4 > The Market Strikes Back PROBLEMS 1 Suppose it is decided that rent control in New York City will be abolished

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