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# eco405answer3 - Eco 405 Assignment 3(Due Feb 20 Wednesday 1...

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Eco 405 Assignment 3 (Due Feb. 20, Wednesday) 1. The rent control agency of New York City has found that aggregate demand is Q D = 160 - 8 P . Quantity is measured in tens of thousands of apartments. Price, the average monthly rental rate, is measured in hundreds of dollars. The agency also noted that the increase in Q at lower P results from more three-person families coming into the city from Long Island and demanding apartments. The city’s board of realtors acknowledges that this is a good demand estimate and has shown that supply is Q S = 70 + 7 P . a. If both the agency and the board are right about demand and supply, what is the free market price? What is the change in city population if the agency sets a maximum average monthly rental of \$300, and all those who cannot find an apartment leave the city? To find the free market price for apartments, set supply equal to demand: 160 - 8 P = 70 + 7 P , or P = \$600, since price is measured in hundreds of dollars. Substituting the equilibrium price into either the demand or supply equation to determine the equilibrium quantity: Q D = 160 - (8)(6) = 112 and Q S = 70 + (7)(6) = 112. We find that at the rental rate of \$600, the quantity of apartments rented is 1,120,000. If the rent control agency sets the rental rate at \$300, the quantity supplied would then be 910,000 ( Q S = 70 + (7)(3) = 91), a decrease of 210,000 apartments from the free market equilibrium. (Assuming three people per family per apartment, this would imply a loss of 630,000 people.)

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eco405answer3 - Eco 405 Assignment 3(Due Feb 20 Wednesday 1...

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