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Unformatted text preview: SD&ZY_20102011/10 ISL233M İ KRO İ KT İ SATUYGULAMA DERS İ10 21.12.2010 57. The elected officials in a west coast university town are concerned about the "exploitative" rents being charged to college students. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the city. An economist at the university estimates the demand and supply curves as: Q D = 5600  8P Q S = 500 + 4P, where P = monthly rent, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical. a. Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both). b. What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in consumer and/or producer surplus. c. Does the proposed rent ceiling result in net welfare gains? Would you advise the town council to implement the policy? Solution: a. To calculate equilibrium set Q D = Q S and solve for P. 5600  8P = 500 + 4P 5100 = 12P P = 425 Substitute P into Q D to solve for Q Q D = 5600  8(425) Q = 2200 Q 5600 8P P 700 0.125Q Q 500 4P P 125 0.25Q D D S = = = = + C.S. = area A C.S. = 0.5(700  425) x 2200 C.S. = 302,500 P.S. = area B SD&ZY_20102011/10 P.S. = 0.5(425  125) x 2200 P.S. = 330,000 Sum of producer and consumer surplus is: 302,500 + 330,000 = 632,500 b. Eventually the market will settle at the quantity supplied corresponding to $350 rent. Q S = 500 + 4(350) Q S = 1900 Q D at P = 350 Q D = 5600  8(350) = 2800 There will be a shortage of 900 apartments. Gain = Consumer surplus is area A Area A = (425  350) x 1900 = 142,500 Area B = loss in consumer surplus To find area B, first find consumer reservation price corresponding to an output of 1900. P = 700  0.125(1900) = 462.50 Difference Q = 2200  1900 = 300 Area B = 0.5(462.50  425) x (2200  1900) Area B = 5625 Loss in consumer surplus is 5625. SD&ZY_20102011/10 Area C is loss in producer surplus not offset by gain in consumer surplus. Area C = 0.5(425  350) x (2200  1900) Area C = 11,250 c. Area A is a gain in consumer surplus, but it is offset by a loss in producer surplus. The net changes are thus B (lost C.S.) and C (lost P.S.). The policy thus results in a deadweight loss....
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This note was uploaded on 02/01/2012 for the course ECON 101 taught by Professor Meonk during the Spring '11 term at Abu Dhabi University.
 Spring '11
 Meonk
 Economics

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