Chapter 7.4, Problem 5R

To determine

To evaluate: The changes to the equilibrium price on apartment rentals when the price ceiling is raised to $700.

Explanation of Solution

  

The government used the strategy of Price ceilings to prevent price rises above an upper limit. Price ceiling in the matter of house rent market has been recognized a great issue. Government implemented measures of price ceiling to reduce the maximum prices that suppliers can charge for the product. This is achieved by making the goods open to the general public. Individuals follow the price ceiling and may take or may not take it seriously. Since, the real price may be at or above the price ceiling, but the price ceiling does not impact the equilibrium price. But on the other hand if the government fixed a rate below $700 then the owners of the apartments are reluctant to build more rental units because it avoids higher rent charges. That will result in a shortage of rented apartments. Hence, Where the legal price is set below the equilibrium price, a price limit causes a scarcity but the quantity supplied has no impact if the legal price is above the market price.

Economics Concept Introduction

Introduction: Government intervenes in a market by the policy of price ceiling and price floor. If a price is set less than the equilibrium level, the demanded quantity may surpass the supplied quantity and result in greater demand or shortages. Price floors forbid a product to fall below a certain amount.