Refer to Figure 66 If the government will not allow landlord

Refer to Figure 6.6. If the government will not allow landlords to charge more than $400 for an apartment, which of the following will happen?

Select one:

a. Demand must eventually decrease so that the market will come into equilibrium at a price of $400.

b. Supply must eventually increase so that the market will come into equilibrium at a price of $400.

c. There will be an excess demand for apartments.

d. The market will be in equilibrium at a price of $400.

700 E600 500 -- 50 100 150 Quality of apartments Figure 6.6

Solution

Equilibrium rental price is $500. If government fixes rent at a ceiling of $400, then demand for rental apartments will increase, but less number of owners will give out their apartment for rent at a lower rental price.

So, there will be excess demand in market.

Correct option (c)

Note: Price is not allowed to change above $400.