The following graph shows the supply and demand curves in this market. The suppl
ID: 1244784 • Letter: T
Question
The following graph shows the supply and demand curves in this market. The supply curve is represented as a vertical line at 4. (To keep the problem simple, we will assume that it is impossible to build new apartments, so the supply remains fixed at four.) On the demand curve, each point is labeled with the name of the corresponding renter. This demand curve shows that, for example, at a price of $700, only two renters, Anne and Bill, would demand an apartment. Please enter a whole number, with no decimal point. (So basically, David and Ellen already live in two rent-controlled apartments that changed the supply of 4 apartments into 2 apartments. In a previous question, since these two people already rented the two apartments, they left the market, the new supply became 2 apartments, and the new equilibrium price became $700 I believe.) I just don't see how lifting price controls change the rent for already non-rent controlled apartments. The two rent controlled ones already have David and Ellen in them...so would you assume they would leave? ~~~~~~ Edit: This is from a previous question that relates to this one. Now, suppose that two of the apartments are subject to rent control. They rent for $300 per month. Suppose that David and Ellen live in these two apartments.The market for apartments not subject to rent control now has only three potential renters (Anne, Bill, and Charlie) and a supply of just two apartments. ~~~~~~ Question: Again, assume David and Ellen live in rent-controlled apartments. By how much will rent on non-rent-controlled apartments decrease if price controls are removed?
Explanation / Answer
From the given figure we can deduce the following,
The equilibrium price is $500, and the equilibrium quantity is 4 appartments.
However, at a rent controlled price of $400, the quantity demanded is 5 units leading to shortage.
With rent Control:
At rent controlled price of $400, david and Ellen live. Furthermore, there are onely two more appartments left, and the price for the 2nd appartment is $700. Therefore, Anne and Bill can afford these remaining 2 appartments. Charlie cannot afford as it is higher than his price of $600.
Thus, david and ellen gets the appartment at a contolled price of $400 and Anne and Bill gets it at a market priuce of $700.
Without rent control:
Without a rent control the market has to operate at an equilibrium price of $500 and the equilibrium quantity is 4 appartments.
At this market price Anne, Bill Charlie and david can afford. However, Ellen cannot afford it.
Furthermore, at a non rent control price
Anne gets a consumer surplus of $800- $500 = $300.
Similarly Bill gets a surplus of $ 200, Charlie gets a surplus of $100. And david gets a zero surplus as the price equls to his willingness to pay.
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