GB3070
NAME:__ARAM BEBEKIAN______
Application Problem Week # 3
1. (4p) Effective January 2020, California passed new rent control legislation. Using what
you learned in economics, briefly discuss, illustrating graphically as needed, what are the
expected effects of a binding rent control in the housing market subjected to binding price
control policy?
Who gains, who losses? How do you know?
What is the effect of a binding rent control in the long run?
What is an unintended consequence of the rent control?
Rent
Price
RED = Demand
BLUE = Supply
Price BLACK = Price Ceiling
Ceiling
Shortage
Number of available rentals
By binding the rent control in the housing market, we will have a lot of adverse effects
coming to light. The people that will gain from this is going to be far less than those that
are going to lose from it. Some renters will benefit from the rent control because they
know the rentals they get will not become to expensive to live in with each passing year.
This is a bad situation for some renters because they will not be able to offer more to get
a house they like, or find more expensive houses with roommates anymore. Owners also
will not benefit because they will not be able to make money on their investments as
much. This will lead to them not having extra income to pay for repairs and eventual
remodeling of their properties. As owners lose out on not being able to remodel, the
rental will not attract new tenants and they might be forced to let them go. This will be
a bad effect in the long run for everyone. An unintended consequence will be that people
will not want to invest in property as rentals because they know it will not be a good
investment and that will create a shortage of properties. This coupled with the
deterioration of the current properties will have a long term negative effect.
1
2. (3p) The market for a particular type of aircraft part is faced with a $50 per-unit tax.
Assume the demand for the parts were more inelastic (long term contracts between buyers
of aircraft parts and the suppliers locked buyers in, at least in the short run) relative to the
supply. With that in mind, who faces a larger tax burden, buyers or sellers? Briefly discuss,
referring to a graphical illustration using the S and D model.
With $50 tax
W/o $50 tax
RED = Demand
BLUE = Supply
Price of part
Quantity of part
Due to the contract that is created, the buyers are the ones that are going to feel the
burden of the tax payment. The sellers are going to benefit because the contracts are
going to make sure that the buyers are always paying for the parts. The demand for the
parts will shift downward, but that is expected when the buyer is stuck with the tax costs.
2
3. (4p) The graph below depicts the market for 4K HDTV.
a. What is the amount of total surplus in this market
assuming no government intervention?
CS The total surplus will be all of the consumer surplus
and the producer surplus.
PS CS = ½ * $600 * 6000 = $1.8 million
PS = ½ * $1200 * 6000 = $3.6 million
TS = CS + PS = $1.8 + $3.6 = $5.4 million
b. Suppose the government imposes a price ceiling at $1,600, what is the total surplus in this
market? Is there an efficiency loss (i.e., DWL)? If so, how much?
CS = A = ½ * $400 * 4000 = $0.8 million
A PS = B+C+D+E+F = (½*$400*4000) + ($200*2000)
B C +($400*4000) + (½*$200*2000) + (½*$800*4000) =
$3.4 million
D E
TS = $0.8 + $3.4 = $5.4 million
F
Since the ceiling is above the equilibrium, there is no
market change and therefore no DWL.
c. Suppose instead of a price ceiling, the government imposes a price floor of $1,600. What
is the total surplus in this market? Is there a DWL? If so, how much?
CS = A = ½ * $400 * 4000 = $0.8 million
PS = B+D+F = (½ * $800 * 4000) + ($200 * 4000) + ($400 * 4000) = $4.0 million
TS = $0.8 + $4.0 = $4.8 million
There is an efficiency loss of $0.6 million due to the price floor that is set.
