Problem Set 2 ̶ Supply and Demand Question 1

Question 60
The equilibrium rent in a town is $500 per month and the equilibrium number of apartments is 100. The city now passes a rent control law that sets the maximum rent at $400. The diagram below summarizes the supply and demand for apartments in this city. a. Use the figure to complete the table below Before Rent Control After Rent Control Change Consumer Surplus Producer Surplus Social Surplus b. Use your answers to part (a) of this problem to answer the following questions
• Did consumer surplus definitely rise, definitely remain constant, definitely fall, or is the direction of the change in consumer surplus unclear
• Did producer surplus definitely rise, definitely remain constant, definitely fall, or is the direction of the change in producer surplus unclear
• Did social surplus definitely rise, definitely remain constant, definitely fall, or is the direction of the change in social surplus unclear
Question 61
According to reports in the Chinese media, commuters in Beijing are facing a somewhat paradoxical situation they find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen. Government-determined gasoline prices have also increased. But the government, worried about rising prices, has left the fares cabs can charge their customers unchanged. a. Use supply and demand curves to explain what has happened in the market for cabs in Beijing. b. Based on your understanding of how the invisible hand works, what do you think should be done to correct this problem

Question 62
Ashley is willing to pay $7, Bill is willing to pay $5, and Carrie is willing to pay $1. a. Sketch demand. b. Write out the demand schedule for each integer price up to $8 ($0, $1, $2, …$8) c. Find Consumer Surplus if price is $2. d. What if another buyer shows up who is willing to pay any amount for one unit. If we take her word at face value, what does the new demand look like fit. Assume zero fixed cost.