Homework #2
This homework is based primarily on the readings found in Chapters 3 through 6 of the Hall and Lieberman text.
1. Suppose the market for rental units in Madison can be described by the following demand and supply curves where P indicates the rent per month and Q equals the number of rental units.
Demand: P = (-1/10)Q + 6000
Supply: (1/50)Q
a. What is the equilibrium price and quantity in this market?
b. Suppose the government passes a law stating that rents cannot exceed $2000 per month. Describe the effect of this law on the Madison rental market. Be specific in your answer.
c. Suppose the government rescinds the law passed in (b) and decides instead to implement a law stating that rents cannot rise above $500 per month. Describe what happens to this market given the new law. Be specific in your answer.
d. Of the two scenarios-(b) or (c)-which one represents an effective price ceiling in this market?