Answered: The town council is contemplating the…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter8: Understanding Markets And Industry Changes

Section: Chapter Questions

Problem 2MC

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The town council is contemplating the imposition of a R350 per month rent ceiling on apartment rooms in the town. An economist at the university estimates the demand and supply curves as: QD = 5600 - 8P QS = 500 + 4P, where P = monthly rent, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical. a) Calculate the equilibrium price and quantity that would prevail without the price ceiling.[1] b) Calculate producer and consumer surplus at this equilibrium. [3] c) Provide a rough sketch of the information calculated in (a) and (b). [2] d) What quantity will eventually be available if the rent ceiling is imposed? What is the amount of the shortage? [2] e) Calculate then resulting impact on consumer and producer surplus.[3] f) What is meant by deadweight loss? Why does a price ceiling usually result in a deadweight loss? In your answer explain the impact on both producers and consumers. [4]

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

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