HW6Sol

# HW6Sol - Homework 6 Solutions Problem 1 is from the 2002...

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Homework 6 Solutions Problem 1 is from the 2002 midterm:

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2. Suppose I have the following marginal willingness to pay curve for gin: q=10-p (where q is the quantity of bottles of gin and p is the price per bottle). Suppose further that gin is illegal and there is no market (and thus no price) for gin. Someone comes to me with a rare opportunity: He just got back from the Caribbean with 5 bottles of gin, and he offers the 5 bottles to me for \$30. Will I accept? (Hint: Ask yourself what the total value of 5 bottles of gin is for me?) P Bottle of Gin D The Total Benefit of 5 bottles of gin is 37.5 10 5 10 Since the total benefit of the 5 bottles of gin is greater than the cost \$30, I will ACCEPT the offer. ASIDE: How to calculate the area? The area is the sum of the area of the upper triangle and the lower square: Area of square = 5 x 5 = 25 Area of the triangle = ½ x 5 x 5 = 12.5 TOTAL AREA = 25 + 12.5 = 37.5 5 3. New York City tries to help poor families by instituting rent control. Under rent control, certain apartments in the city are designated as "rent control apartments" with a price ceiling on how much rent the landlords can charge. Assume that there are no income effects so that demand is the same as marginal willingness to pay. a. Draw a graph with apartments on the horizontal axis and rents (the monthly price of apartments) on the vertical. Draw a demand and a supply curve. Suppose that the rent control price ceiling is below the equilibrium point and illustrate how you would find the “disequilibrium” shortage in apartments in New York on this graph.
Apartments Rent Price Ceiling D = MWP S Equilibrium Price Shortage Q supplied Q Demanded b. Suppose that, despite the shortage, the New York City government makes sure that the apartments that are provided are given to those consumers who are willing to pay the most for them (even though they only have to pay the price ceiling). On your graph, illustrate producer surplus, consumer surplus and dead weight loss. Apartments Rent Price Ceiling D = MWP S Consumer Surplus These people will get housing Q supplied Q Demanded Producer Surplus DWL

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c. Now suppose that the New York City government cannot easily identify how much people are willing to pay for apartments. So the government informally develops a system whereby people must bribe the mayor in order to get the right to live in a rent controlled apartment. Assuming the mayor makes sure the bribe he asks for is just enough to get all the apartments rented, can you tell on your graph what this bribe will be under rent control? Will the people who get the apartments be different than the ones who got them in part b? Does consumer surplus and producer surplus change? Assuming we count the mayor as part of society (so that all the bribes he collects benefit someone in society) does the dead weight loss change? Apartments
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## HW6Sol - Homework 6 Solutions Problem 1 is from the 2002...

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