ECON 201 QUIZ 4

this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 450 million boxes. For each price listed in the following table, determine the quantity of oranges demanded, the quantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls. Price Quantity Demanded Quantity Supplied Pressure on Prices (Dollars per box) (Millions of boxes) (Millions of boxes) 530 270 Upward 15 350 630 Downward 35 True or False: A price ceiling above $25 per box is not a binding price ceiling in this market. (Economists call a price ceiling that prevents the market from reaching equilibrium a binding price ceiling.) True False In order for a price ceiling to be binding—that is, for it to prevent the market from reaching equilibrium—it must be set below the equilibrium price. In this case, you found that the equilibrium price was $25 per box. Therefore, any price ceiling below $25 per box would be binding, and any price ceiling set at or above $25 per box would not. 2. Price controls in the Florida orange market The following graph shows the annual market for Florida oranges, which are sold in units of 90- pound boxes. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. In this market, the equilibrium price is $25 per box, and the equilibrium quantity of oranges is 400 million boxes. For each price listed in the following table, determine the quantity of oranges demanded, the quantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls. Price Quantity Demanded Quantity Supplied Pressure on Prices (Dollars per box) (Millions of boxes) (Millions of boxes) 480 200 Upward 20 320 580 Downward 30 True or False: A price ceiling below $25 per box is not a binding price ceiling in this market. (Economists call a price ceiling that prevents the market from reaching equilibrium a binding price ceiling.) True False 3. How rent control causes inefficiency Suppose the following graph shows the demand for, and supply of, apartments in New York City. Use the black point (plus symbol) to indicate the equilibrium monthly rent and quantity of apartments in the absence of price controls. Then use the green point (triangle symbol) to fill the area representing consumers’ surplus, and use the purple point (diamond symbol) to fill the area representing producers’ surplus. Suppose that the government decides to impose a rent control of $1,900 per month on rental apartments in New York City. On the following graph, use the green point (triangle symbol) to shade the area representing consumers’ surplus in the presence of rent control. Use the purple point (diamond symbol) to shade the area representing producers’ surplus after the rent control. Then use the grey point (star symbol) to shade the area representing deadweight loss resulting from the rent control. In the presence of the rent control, consumers’ surplus increases by $80 million per month and producers’ surplus decreases by $240 million per month. The price ceiling on rent causes $160 million per month of deadweight loss. Tool tip: Click on the shaded regions in the graph to see their areas. Which of the following are generally true of rent control? Check all that apply. People most in need of an apartment may not be able to rent one. All consumers gain from rent control. Non-price methods of rationing emerge. The quantity of available rental apartments increases. The quality of rental apartments improves. incentive to convert existing apartments to other, more profitable uses, decreasing the number of units available to renters in the future. In addition to shortages, rent control has the following consequences. First, landlords provide less maintenance and are unlikely to upgrade their units, since they cannot pass these costs on through higher rents. Because of reduced maintenance, quality suffers, and apartments deteriorate more rapidly than they otherwise would. Second, a price ceiling on rent may compel renters to make under-the-table payments to secure apartments, leading to the development of a black market for rental units. Rent control also encourages the use of nonprice-rationing devices in the allocation of rental units, resulting in inefficiency, since renters may have to spend more time and effort searching for apartments. The use of nonprice-rationing devices leads to misallocations of rental apartments, as people who can afford the rent and are in urgent need of a rental apartment may be unable to rent an apartment due to the limited quantity of spaces available, whereas people with less urgent needs may obtain apartments. Finally, rent control incentivizes tie-in sales, as landlords, compelled to charge below-equilibrium rents, find they can tie apartment rentals to sales of other goods and services, e.g., furniture in an apartment. Note that rent control benefits a group of consumers while hurting another group of consumers. Consumers who are able to rent an apartment benefit from the lower rent. Consumers who are willing to pay the equilibrium rent but fail to rent an apartment due to the reduction in quantity supplied are hurt by the rent control policy. 3. How rent control causes inefficiency Suppose the following graph shows the demand for, and supply of, apartments in New York City. Use the black point (plus symbol) to indicate the equilibrium monthly rent and quantity of apartments in the absence of price controls. Then use the green point (triangle symbol) to fill the area representing consumers’ surplus, and use the purple point (diamond symbol) to fill the area representing Suppose that the government decides to impose a rent control of $2,000 per month on rental apartments in New York City. On the following graph, use the green point (triangle symbol) to shade the area representing consumers’ surplus in the presence of rent control. Use the purple point (diamond symbol) to shade the area representing producers’ surplus after the rent control. Then use the grey point (star symbol) to shade the area representing deadweight loss resulting from the rent control. In the presence of the rent control, consumers’ surplus increases by $100 million per month and producers’ surplus decreases by $300 million per month. The price ceiling on rent causes $200 million per month of deadweight loss. Tool tip: Click on the shaded regions in the graph to see their areas. Which of the following are generally true of rent control? Check all that apply. The quantity of available rental apartments increases. The quality of rental apartments falls. All consumers gain from rent control. Everyone who needs a place to live can rent an apartment. Non-price methods of rationing emerge. Points: 1 / 1 Explanation: Close Explanation Rent control forces landlords to price apartments below the equilibrium price level, causing the quantity of available rental apartments to fall relative to the quantity demanded. This creates a shortage (excess demand). Moreover, because the profitability of owning and renting apartment units decreases under rent control, landlords construct fewer new units and have an incentive to convert existing apartments to other, more profitable uses, decreasing the number of units available to renters in the future. In addition to shortages, rent control has the following consequences. First, landlords provide less maintenance and are unlikely to upgrade their units, since they cannot pass these costs on through higher rents. Because of reduced maintenance, quality suffers, and apartments deteriorate more rapidly than they otherwise would. Second, a price ceiling on rent may compel renters to make under-the-table payments to secure apartments, leading to the development of a black market for rental units. Rent control also encourages the use of nonprice-rationing devices in the allocation of rental units, resulting in inefficiency, since renters may have to spend more time and effort searching for apartments. The use of nonprice-rationing devices leads to misallocations of rental apartments, as people who can afford the rent and are in urgent need of a rental apartment may be unable to rent an apartment due to the limited quantity of spaces available, whereas people with less urgent needs may obtain apartments. Finally, rent control incentivizes tie-in sales, as landlords, compelled to charge below-equilibrium rents, find they can tie apartment rentals to sales of other goods and services, e.g., furniture in an apartment. Note that rent control benefits a group of consumers while hurting another group of consumers. Consumers who are able to rent an apartment benefit from the lower rent. Consumers who are willing to pay the equilibrium rent but fail to rent an apartment due to the reduction in quantity supplied are hurt by the rent control policy. 3. How rent control causes inefficiency Suppose the following graph shows the demand for, and supply of, apartments in New York City. Use the black point (plus symbol) to indicate the equilibrium monthly rent and quantity of apartments in the absence of price controls. Then use the green point (triangle symbol) to fill the area representing consumers’ surplus, and use the purple point (diamond symbol) to fill the area representing producers’ surplus.