Question

The following table depicts the quantity demanded and quantity supplied of studio apartments in a small college town.

Monthly Rent	Quantity Demanded	Quantity Supplied
$600	3000	1600
$650	2500	1800
$700	2000	2000
$750	1500	2200
$800	1000	2400

A) What are the market price and equilibrium quantity of apartments in his town?

B) If this town imposes a rent control of $600 per month, how many studio apartments will be rented?

C) What do you predict if the rent rises to $800?

D) Explain what would happen if there was a safety issue of renting the apartments resulting in the decrease to 700 units? what would be new equilibrium price and quantity?

E) Define price floor and price ceiling? Which leads to shortage? Which leads to a surplus? why?

Answer 1

Part A)

Equilibrium Market price = $700

Equilibrium Quantity = 2000 units

Part B)

If this town imposes a rent control of $600 per month, only 1600 studio apartments will be rented. This is because the supply would fall to 1600 units, however, the increased quantity demanded will not be fulfilled.

Part C)

If the rent rises to $800 per month, only 1000 studio apartments will be rented. This is because the quantity demanded would fall to 1000 units, however, the increased quantity supplied will be of no use.

Part D)

The question doen not specify that whether quantity demanded is falling to 700 units or quantity supplied.

Assuming that quantity supplied falls to 700 units,

the new equilibrium price would be $375 and new equilibrium quantity will be 700 units.

Part E)

Price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.

Price ceiling is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.

Price floor leads to surplus because quantity supplied is more than quantity demanded.

However, Price Ceiling leads to a shortage because the quantity demanded is more than quantity supplied.