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Class02_4

# Class02_4 - Class Notes(cover part of Chapter 6 in the...

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02/04/2008 Class Notes (cover part of Chapter 6 in the textbook) Class Outline Price Controls: 1. Price Ceilings 2. Price Floors Price Controls Def . Price Ceiling A price ceiling is a regulation that makes it illegal to charge a price higher than a specified level. Ex. Rent Controls, Salary caps. Def . Price Floor A price floor is a regulation that makes it illegal to charge a price lower than a specified level. Ex. Minimum wage, Farm price support 1. Price Ceiling (Max legal Price) Example: Housing market and rent ceiling Consider the housing market as represented by: 4 4000 'Demand Function' 800 'Supply Function' d s q p q p = - + = - In equilibrium: 4 4000 800 * \$960 * 160 s d q q p p p q = - + = - = = 1

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In equilibrium: CS*= \$(1000 960)*160 \$3,200 2 - = PS*= \$(960 800)*160 \$12,800 2 - = Total Surplus*= CS*+PS*= \$16,000 Now, suppose the government intervenes and sets a rent ceiling at p ceil = \$900 At p ceil =\$900 q d =400 > q s =100 A price ceiling induces a shortage in the market ! However, legally the price cannot exceed \$900. The number of houses for renting will equal 100.
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Class02_4 - Class Notes(cover part of Chapter 6 in the...

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