Assume that the City Council in Prescott, Arizona is considering implementing price ceilings on rental units based on the number of bedrooms in the unit. The demand function for rental units (on a single bedroom equivalent basis) is given by QD = 120 – 4P and the supply function is given by QS = 2P, where P is price and Q is quantity. The Council is considering imposing a ceiling price on rental units of Pmax = 16.
1. Using the given functions, draw a corresponding demand curve and a supply curve. Properly label the equilibrium price and quantity. Then show what will happen to equilibrium if the City Council imposes a price ceiling at 16.
NOTE: There are numerous guides online that demonstrate how to draw supply and demand curves; most are done in Excel. To create the demand curves that you need for this assignment, create an Excel file with a price column, including prices from $1 to $30. Using the formulas, compute the quantity demanded at each price and quantity supplied for each price. Then copy and paste the graph into your Word document where you will write out answers to the following questions.
2. Are consumers of rental-housing in Prescott well-served by this price ceiling policy? Provide a careful economic analysis in support of your claim. In particular, discuss what happens if a regulated price is set that is not equal to the equilibrium price.
3. Suppose that the Council is concerned that landlords will allow the quality of their rental units to deteriorate following the imposition of the ceiling price. What can you infer about the level of quality that landlords’ provision will allow if consumers are worse off, following the imposition of the ceiling price? Provide a careful economic analysis in support of your claim.
4. Suppose now that the proposal before the City Council contemplates imposing a price ceiling on apartment rentals, but not on house rentals. Would owners of rental houses in Prescott be likely to support this proposal, or would they prefer the status quo (i.e., no price ceilings)? Provide the economic rationale for your answer. (In answering this question, you should ignore all supply-side considerations. In other words, just assume that supply adjusts fully to accommodate demand.)
5. Find three recent scholarly articles concerning proposals to increase the minimum wage in the United States. Using a supply, demand and, in this case, price floor analysis similar to what you did for the rental unit price ceiling, for this assignment write a 3 to 5-page analysis, based on sound economic principles, of the proposal.
Chapter 7: Supply, Demand, and Equilibrium
Kevin C. Klein
In: 21st Century Economics: A Reference Handbook
Edited by: Rhona C. Free
Prices come from supply and demand: Supply and demand. (2012). In Big ideas simply explained: the economics book. London, UK: Dorling Kindersley
Prices. (2015). In T. Riggs (Ed.), The Gale encyclopedia of U.S. economic history (2nd ed.). Farmington, MI: Gale.
Winn, A. M., Parente, M. L., & Porter, D. (2016). Seller Beware: Supply and Demand Reduction and Price Manipulation in Multiple-Unit Uniform Price Auctions. Southern Economic Journal, 82(3), 760–780.