Rent ceilings in Enchilada Grande

This problem tests your understanding of the effect of a price ceiling. It also requires you to work with price elasticities of demand and supply.  Price elasticity was introduced in detail in Professor Trejo's lectures.  There is a thorough discussion of price ceilings on    pages 169 and 170 of the text.

1.  In the rental housing market in the town of Enchilada Grande, the
        price elasticity of demand is -1 and the price elasticity of
        supply is 2. The market is currently in competitive equilibrium.
        A rent-control ordinance is proposed which would set the maximum
        rent at a rate 20% lower than the current rate.  If this proposal
        is adopted

        (a) the demand curve in Enchilade Grande would shift down by
            20%.
        (b) the supply curve in Enchilade Grande would shift down by
            40%.
        (c) the demand curve in Enchilade Grande would shift up by 20%.
        (d) the demand curve in Enchilade would shift up by 60%.
        (e) this policy would not shift either the demand curve or the
            supply curve.

    2.  If the rent control ordinance is adopted in Enchilada Grande,
        then the quantity of rental housing that is demanded at the new
        legal maximum price will be

        (a) 20% greater than the amount that was demanded before the
            ordinance went into effect.
        (b) 40% greater than the amount that was demanded before the
            ordinance went into effect.
        (c) 20% smaller than the amount that was demanded before the
            ordinance went into effect.
        (d) 40% smaller than the amount that was demanded before the
            ordinance went into effect.
        (e) the same as the quantity that was demanded before the
            ordinance went into effect.

    3.  If the rent-control ordinance is adopted in Enchilada Grande,
        then the number of housing units that are actually rented will

        (a) increase by 20%.
        (b) increase by 40%.
        (c) decrease by 40%.
        (d) increase by 40%.
        (e) not change.
 

 
 

                                  Answer Key

 

         1.   E
         2. A
        3.   C