Econ200 Exam 2 Fall'18.doc.doc

Econ200 Exam 2 Fall'18.doc.doc - Haideh Salehi-Esfahani...

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Haideh Salehi-Esfahani Copyright 2018 Second Exam-Econ 200A Fall 2018 100 points Answer Key Please write legibly and fully label your graphs. We will deduct points for illegible writing, unclear explanations, and unlabeled or mislabeled graphs. 1. (25 points) The rising price for rental units in the Seattle area have led to proposals for rent control. a. Draw a supply and demand graph for the market for rental homes showing the area of the dead weight loss in the graph and illustrate the effects of rent control. Fully explain all the efficiency effects of rent control for rental units in the Seattle area. Would you expect cases of discrimination by landlords to increase or fall when rent control goes into effect? Explain. (15 points) Answer: The rent control is a price ceiling in the market for rental homes. The quantity demanded exceeds the quantity supplied and there is now a shortage (Qd-Qs). The lost gains from trade: - The triangle to the left of the equilibrium and right of Qs. - The resulting non-price competition that may wipe out the rest of the consumer surplus (to the left of Qs, above the price, and below the demand curve). Due to the shortage, there is likely long (and costly) waiting for anyone who wants to rent a home. There will be more incidences of discrimination by the landlords since there is a long line of applicants for their rental unit. They may therefore pick and choose “who” they want to rent their home to. 1 Q of rental homes Rent S D Qs Qd Rent control Market for Rental Homes
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Haideh Salehi-Esfahani Copyright 2018 [In the short run, the supply of (rental) housing is fixed. Please note that the question does not specify short run. That would be a specific information that is absent in this question. However, if a student writes down that they are adding this assumption on their own , and hence they draw the supply perfectly inelastic and do the correct analysis with the perfectly inelastic supply of rental housing, they deserve and will receive full points.] b. Consider the markets for rental homes, and, owner-occupied homes. Assume that rental homes can be easily converted into owner-occupied homes. What is the effect resulting from the imposition of rent control on the equilibrium price and quantity of owner-occupied homes? Use a graphical analysis to illustrate your answer and briefly explain. (10 points) As some homeowners remove their homes from the rental market, they may convert them into owner occupied homes. Therefore, in the market for owner-occupied homes, the supply increases (supply curve shifts south-east!). As a result, the equilibrium price falls and the equilibrium quantity supplied and demanded rises. The assumption that demand for owner-occupied home also rises, depends on asserting that people who rent houses will now desire to buy homes. This assumption is not reasonable. (Normally and much of the time, people who rent are those can NOT afford to buy a house, as there is a 10% to 20% upfront cost for the mortgage. The high initial cost of buying a house is an important reason why people rent). However, if a student adds in the assumption and correctly 2 Q of owner-occupied homes Price S D Qe Q1 Pe Market for Owner-Occupied Homes S’ P1
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