Posted: March 16th, 2017
What can you infer about the level of quality that landlords provision if consumers are worse off following the imposition of the ceiling price? Provide a careful economic analysis in support of your claim.
Assume that the City Council in Prescott, AZ 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 giving consideration to imposing a ceiling price on rental units of Pmax = 16.
- 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. (There are numerous guides online that demonstrate how to draw supply and demand curves; most are done in Excel and then you can copy and paste the graph into your word document where you will write out answers to the following questions).
- Are consumers of rental-housing in Prescott well-served by this price ceiling policy? Provide a careful economic analysis in support of your claim.
- 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 if consumers are worse off following the imposition of the ceiling price? Provide a careful economic analysis in support of your claim.
- 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 Manhattan 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).
Next, find 2 recent scholarly articles concerning proposals to increase the minimum wage in the U.S. Using a supply, demand and, in this case, price floor analysis similar to what you did for the rental unit price ceiling, write a 2 page analysis, based on sound economic principles, of the proposal.
Note: To create supply and demand curves, solve for equilibrium and discuss what happens if a regulated price is set that is not equal to the equilibrium price. You might find the following websites to be helpful for this assignment: