The elected officials in a west coast university town are co

The elected officials in a west coast university town are concerned about the \"exploitative\" rents being charged to college students. Currently, 2,200 apartment units are rented are $425 per month (P=$425 and Q=2,200) where P = monthly rent, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the city. An economist at the university has estimated that the price elasticity of demand and supply are: (-17/11) and (17/22), respectively.

a. Assuming that demand and supply are linear, compute the demand and supply equations.

b. Sketch a diagram showing both producer and consumer surplus at this equilibrium.

c. What quantity (compute this number please) will eventually be available if the rent ceiling is imposed? Sketch a diagram showing any gains or losses in consumer and/or producer surplus.

d. Does the proposed rent ceiling result in net welfare gains? Would you advise the town council to implement the policy? Explain

Solution

B

In perfect competition and the monopolistic competition, there are no barrier to entry and exit in the market. Hence, the number of firms are huge in these two markets.

2.

B

Players are relatively small in the market of perfect competition and monopolistic competition.

3.

D

there are many players in these markets due to no any barrier of entry and exit. Hence, one firm has many competitors.

4.

D

In monopolistic competition, there is a case of product differentiation. But, in perfect competition, products are homogeneous in nature.

5.

A

The price and quality is decided on the basis of MR = MC.

The condition of MR, equal to MC is chosen by the monopoly as well as monopolistic firm.