1. (20 points) The market for apartments in Hartford is illustrated in the graph
ID: 1138368 • Letter: 1
Question
1. (20 points) The market for apartments in Hartford is illustrated in the graph below. The City Council is considering rent control ordinance. Apartments in Hartford 1,500- 1,400 1,300 1,200 1,100- 1,000 900 800 700 600 500 400 300 200 100 0 Demano 02 Quantity of Apartments a. In the absence of rent control, how much consumer surplus is created? How much producer surplus? What is the total surplus? b. If the City imposes rent control setting a maximum rent (price ceiling) of $1,300 per month, how much consumer surplus is created now? How much producer surplus? What is the total surplus? What is the Dead Weight Loss? c. If the City imposes rent control setting a maximum rent (price ceiling) of $700 per month, how much consumer surplus is created now? How much producer surplus? What is the total surplus? What is the Dead Weight Loss? d. Why might apartment owners (landlords) in places like West Hartford and Manchester be happy to see rent control in Hartford - assuming they can prevent it from being implemented in their home towns?Explanation / Answer
a) When there is no rent control, market rent is 1200 and number of apartments is 30000. CS = area between demand curve and price line = 0.5*(1500 – 1200)*30000 = $4.5 million. PS = area between supply curve and price line = 0.5*(1200 – 200)*30000 = $15 million. Total surplus = PS + CS = $19.5 million
b) This rent is not binding because the current rent at $1200 is already less than maximum rent of $1300. Hence still CS = $4.5 million and PS = $15 million so that TS = $19.5 million and there is no DWL.
c) At a rent of $700, market quantity is 15000 and so CS = 0.5*(1500 – 700 + 1350 - 700)*15000 = $10.875 million and PS = 0.5*(700 – 200)*15000 = $3.75 million. DWL = 0.5*(1350 – 700)*(30000 – 15000) = $4.875 million.
d) Because this will switch home seekers from Hartford to their town where they can charge them a higher rent. In Hartford there will be a shortage of apartments which will encourage them to move to other places.
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