Question

1) The equations below can be used to analyze the apartment rental market of Detroit, Michigan. The city of Detroit has hired you as a consultant to compare two polices aimed at reducing the cost of housing. ?=????−.???? ?=???+.???

a) Calculate the equilibrium price and quantity for housing, show graphically. Be sure to include all supply and demand intercepts. Use a straight edge to draw the graph.

b) Suppose that a $120 subsidy is given to each renter (consumer). Calculate the after-subsidy quantity, price consumers pay, and price sellers receive. Show solution graphically.

c) Calculate the total cost of the subsidy.

d) Calculate the deadweight loss.

e) Suppose that the government decides to replace the subsidy with a price control. The government sets a price ceiling of $860 dollars in the apartment rental market. Calculate the number of apartments that will be rented under the new policy and show graphically.

f) How many people will lose an apartment?

g) Calculate the change in social welfare under the new policy.

h) Write a small paragraph comparing the two government policies. Which would you support and why?

Answer 1