Long Response Questions
1. You are a member of the city council and are considering a law to control rents below the free market rent. Answer the following questions, and use a graph in your explanation.
A) What would be the effect of this rent-control law in the short run? Why?
In the short run, this would create a shortage. There is no time to sell or convert apartments. Quantity supplied (Qs) stays the same, but quantity demanded increases to Qd. A shortage exists from Qs to Qd.
B) What would be the effect of this rent control law in the long run? Why?
In the long run, the shortage would be more acute because there would be fewer incentives to build more apartments. Apartments would be converted to condominiums or sold for other businesses. Quantity supplied would move to Q. Also, underground markets could develop, and creative apartment owners could actually charge a price of Pum
2. In a perfectly competitive market in long-run equilibrium, what would be the immediate results of imposing and enforcing a price ceiling below the equilibrium price of the product? What would be the long-run effect of continuing to enforce the ceiling price, assuming underground markets don’t develop? Be sure to explain why the predicted effects will occur.
A price ceiling would cause a shortage. Quantity demanded would increase and quantity supplied would decrease. The shortage would be greater in the long run. This is because supply and demand are both more elastic in the long run. This could also be shown by shifting the supply curve leftward in the long run.
3. Assume the market for unskilled workers is perfectly competitive and in equilibrium. Then a minimum wage is imposed, which increases the wage rate of unskilled workers.
A) Use supply and demand analysis to explain how this increase in the wage rate will affect each of the following:
i) the number of workers employed in the market
ii) the number of unskilled workers seeking employment in the market
A)This is a price floor.
iii) the minimum wage would decrease the number off workers employed in the industry (quantity of workers demanded)
iv) it would also increase the numbers of workers seeking employment (quantity of workers supplied)
B) Assume that the fast-food industry is perfectly competitive and employs only one factor of production: unskilled workers. Use supply and demand analysis to explain how the increase in the wage rate resulting from the imposition of the minimum wage will affect each of the following in the fast-food industry in the short run.
i) Price of fast food
ii) Quantity of fast food produced
B)Higher wages increase the costs of production, so supply would decrease, or shift to the left. This would cause the price of fast food to increase and the quantity of fast food produced to decrease.
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