The Chicago City Council is concerned about the high rents being charged to some residents and is contemplating the imposition of a $600 per month rent ceiling on apartments in the city. An economist at UIC estimates the demand and supply curves as: QD = 9200 - 8P and QS = -400 + 4P.
a. Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both).
b. What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in consumer and/or producer surplus.
c. Does the proposed rent ceiling result in net welfare gains? Would you advise the City Council to implement the policy?