Problem
The elected officials in a west coast university town are concerned about the "exploitative" rents being charged to college students. The town council is contemplating the imposition of a R350 per month rent ceiling on apartments in the city. 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.
1. Calculate the equilibrium price and quantity that would prevail without the price ceiling.
2. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both).
3. What quantity will eventually be available if the rent ceiling is imposed? What is the amount of the shortage?