Question

Suppose that the market for rental homes is rent-controlled, and that the market is iniatlly at the quantity and price implied by the rent control. Other things being equal, the increase in rents that occurs after rent controls are abolished is smaller when:

Select one:

A. the own price elasticity of demand for rental homes is price inelastic.

B. rented homes and owned homes are substitutes.

C. rented homes and owned homes are complements.

D. the own price elasticity of demand for rental homes has unitary price elasticity.

E. the own price elasticity of demand for rental homes is price elastic.

EXPLAIN YOUR ANSWER

Answer 1

Other things being equal, the increase in rents that occurs after rent controls are abolished is smaller when the own-price elasticity of demand for rental homes is price inelastic. Elasticity explains the percentage change in quantity demanded with respect to the percentage change in prices. So even after the rent control when the rents i.e. the price of rental homes increases, people are abolishing it in a smaller extent it means that demand is inelastic and people are ready to rent homes even at a higher price(rents) of rented homes.