Question

Elected officials in an east 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 all apartments in town. An economist at the university estimates the demand and supply curves as:

QD =5,100−8P QS =4P,

where P is monthly rent, and Q is the number of apartments.

2a) What is the equilibrium price and quantity of apartments in the market? Provide a detailed diagram to support your answer.

2b) What is consumer and producer surplus in equilibrium? Label consumer and producer surplus on your diagram.

2c) How many apartments will be available is the city council imposes the rent control? Illustrate the effect of rent control on your diagram.

2d) What is consumer and producer surplus after the imposition of rent control?

Answer 1