Homework One
ARE 100B
Winter 2025
Question 1 (Price ceilings): The city council of Davis are concerned about the high rents being charged to
college students. They’re considering placing a $600 rent ceiling on all one-bedroom apartments in the city. An
economist at the university estimates the demand and supply curves for this market to be:
𝑄D =9,000−4𝑃
S
𝑄 =400+6𝑃
where P is monthly rent, QD is the quantity of apartments demanded, and QS is the quantity of apartments
supplied.
a) What is the equilibrium price and quantity of one-bedroom units rented in Davis without rent control?
Calculate and show graphically.
b) What is the equilibrium price and quantity of one-bedroom units rented in Davis with a rent ceiling of
$600? Calculate and show graphically.
c) Does the rent ceiling create a shortage? If so, what is the shortage? Show graphically.
d) Calculate the change in welfare to consumers and producers when the rent ceiling implemented. Are
renters better-off with the rent ceiling?
e) Sometime government policies have unintended consequences. Use the article below (a full pdf can be
found in files) to briefly discuss how rent-control impacts incentives or landlords to provide and
maintain rental units.
[Link]
housing-costs
Landlords may convert units to condos, put less money into maintenance.
Question 2 (Taxes) The market for bike rentals in Davis is characterized by demand and supply equations:
QD=50-3P
QS=2P
Assume the market for bike rentals is perfectly competitive. The mayor decides to raise revenue for a new bike
lane by taxing bike rental companies $1 per hour for bike rentals.
a) Graph the supply and demand curves. What is the pre-tax equilibrium price and quantity? Label
on graph.
b) What is the post-tax equilibrium quantity? Label on the graph.
c) How much burden do consumers bear? Producers? Label on graph.
d) Calculate and label the DWL generated by the tax.
e) Suppose the mayor wants the consumer to bare the burden of the tax, not the small business
owner so they decide to tax the consumption of bike rentals rather than the sellers. Is this an
effective strategy?
Question 3 (Government Policies and Supply) You will watch the video “Big Government Cheese” (Planet
Money, NPR) to answer the following question.
Link: [Link]
a) What different government interventions, discussed in the video, are utilized to increase the price of
milk?
b) Suppose the demand and supply for milk are given, respectively, by:
𝑄D =350−50𝑃
𝑄 S =−50+30𝑃
where Q is quantity in gallons and P is measured in dollars per unit. What is the equilibrium price and
quantity without government interventions.
c) The American public is concerned about the well-being of dairy farmers and Congress responds by
implementing a price support as described in “Big Government Cheese” (the policy tool used by Carter).
The government guarantees a price of $6 per gallon of milk for US farmers. Show what this price
support looks like graphically. Label the quantity purchased by consumers and the amount purchased by
the government.
d) What are total government expenditures under the program from part C?
e) Compare consumer surplus with and without price support to determine if consumers are better or worse
off under the policy (compare B to C).
f) Price supports were very expensive to the US government and encouraged farmers to increase
production. The cost of the dairy program in the 1983 fiscal year rose above $2.7 billion (in 1983
dollars). Show graphically how the government price support described in “Big Government Cheese”
(implemented by President Jimmy Carter) affects government expenditures.
Question 4 (More Price Supports) Suppose the government implements a deficiency payment guaranteeing
farmers a price of $6 per gallon (rather than the price support described in part b).
a) What is the new quantity and price paid by consumers with the deficiency payment in place? Show
graphically.
b) Label consumer surplus, producer surplus, and government expenditures on your graph (below
c) Calculate consumer surplus, producer surplus, and government expenditures to compare welfare under
1) the deficiency payment 2) Carter price support 3) no intervention.
