Macroeconomics of Government - Assignment Example

Without a price ceiling, the equilibrium rent is set at $1,400 per month where 2,000,000 apartments are rented. A price ceiling imposed by the government sets the maximum legal amount payable as rent at $1,000 forcing the landlords to reduce the quantity supplied to 1,900,000 apartments. • The rent limit increases the number of houses demanded to 2,100,000 apartments. • The difference between houses demanded and houses supplied (200,000 apartments) represents a shortage.• Rectangle D represents an increase in consumer surplus.

The consumer surplus is represented by region D+F. • The rent control policy pushes the producer surplus down to region C. Both triangles A and B represent the deadweight loss. The price ceiling has three unintended consequences:• The price ceiling creates a shortage of apartments; since the number of apartments demanded exceeds the number of apartments supplied. • The last apartment rented also has a higher marginal benefit as compared to the marginal cost incurred for supplying it.

• The rent control policy decreases economic efficiency due to a reduction in economic surplus in the supply of apartments.2. The supply of coffee is influenced by the demand among Type II diabetes patients. Figure 2: Effect of coffee workers’ strike • Initially, the market equilibrium price and quantity for coffee were at P and Q respectively. • The workers’ strike halted the production of coffee increasing its demand by a greater proportion, from D to D1.• Suppliers had to raise the price of coffee to match increased demand.

The resultant decrease in aggregate supply is represented by an inward shift on the supply curve. • The supply (SS) curve shifts to S1 from S and the demand curve from D to D1 to represent the new market price and quantity at p2 and y2 respectively. The change in quantity is not as much as the change in price. The increase in price is attributable to acts of hoarding by the coffee suppliers. • Hoarding reduces the quantity of coffee supplied in the market.