Ch09 - CHAPTER 9 The Analysis of Competitive Markets 1. The...

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CHAPTER 9 The Analysis of Competitive Markets 308 1. 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

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TEST BANK CHAPTER 9 SIXTH EDITION THE ANALYSIS OF COMPETITIVE MARKETS 309 C.S. = 0.5(700 - 425) x 2200 C.S. = 302,500 P.S. = area B 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
CHAPTER 9 TEST BANK THE ANALYSIS OF COMPETITIVE MARKETS SIXTH EDITION 310 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. 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. The deadweight loss = lost C.S. + lost P.S. or 5625 + 11250 = 16,875. Deadweight loss = 16,875

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TEST BANK CHAPTER 9 SIXTH EDITION THE ANALYSIS OF COMPETITIVE MARKETS 311 2. In a competitive market, the following supply and demand equations are given: Supply P = 5 + 0.36Q Demand P = 100 - 0.04Q, where P represents price per unit in dollars, and Q represents rate of sales in units per year. a.
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Ch09 - CHAPTER 9 The Analysis of Competitive Markets 1. The...

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