Supply, Demand and Government Policies: Price Ceilings and Elasticity of Demand

Information about the housing market for two bedroom rental units in Vancouver

1. You have been given the following information about the housing market for two bedroom rental units in Vancouver:

Rent                              Quantity Demanded                Quantity Supplied

(dollars per month)               (per month)                         (per month)

1,100                                     20,000                                        0

1,200                                     15,000                                       5,000

1,300                                     10,000                                       10,000

1,400                                     5,000                                         15,000

1,500                                     2,500                                         20,000

1,600                                     1,500                                         25,000

Hand draw a supply and demand graph to illustrate the housing market above.

a) What is the equilibrium rental price?

b) What is the equilibrium quantity of housing?

2.  Now suppose that a price ceiling of $1,200 rent per month is imposed in the Vancouver housing market described above in problem

a) What is the new quantity of housing demanded?

b) What is the quantity of housing that landlords would be willing to supply?

c) What is the excess quantity of housing demanded?  

3.  You are a landlord and historically had received $1,600 per month for your two bedroom rental, but now that rent control has been imposed by the government, the maximum rent that you could collect from tenants would be $1,200.

a. Would you want to invest money into fixing up or maintaining your rental property? Why or why not?

b. In the long term, what will happen to the quality and quantity of housing in Vancouver if this rent control is imposed?

c. Why would the city of Vancouver impose rent controls?

d. Who are rent controls meant to help? Does it help those people that it is intended to help?

e. Do you agree or disagree with the use of government imposed rent controls?  Explain(Your opinion)

4.  In each of the following, compare the price elasticity of demand for each pair of goods. Explain why the demand for one of the goods is more elastic than the other:

a. ) A flat screen TV  versus an ipod.

b. ) Electricity just after an increase in its price versus electricity two years after the price increase.

c. ) Acetominophen versus Tylenol brand acetaminophen

d. ) Ipads when they first were produced versus Ipads two years from now.

5.  In Vancouver, the public bus system, Translink, uses a multi-tiered system for fares depending on which zone you live in and where you are going. For example, you either pay $2.50 for one zone or $3.75 for two zones, etc.  

Some people are in favour of getting rid of the multi-tiered system.  They argue that the quantity of transit service demanded would increase sharply if everyone had to pay only $2.50 no matter where you live. They argue that that the increase in revenue due to the increase in ridership would offset any revenue loss due to lower fares.

Those people against the possible change in fares believe that Translink would lose money because of the lower fare paid by some people.

a.)  What might the advocates (those in favour) of the new proposal be thinking about the elasticity of demand for public transportation?

b.)  What might those people against the possible change in fares be assuming about the elasticity of demand for public transportation?

c.)  If total revenue rises, what would you forecast for the price of car parking spaces downtown?