Using a supply and demand graph, illustrate the market for rent-controlled apartments with the following data:
Equilibrium rent without rent control: $1,500
Rent with rent control: $700
Quantity of apartments demanded with rent control: 50,000
Quantity of apartments supplied with rent control: 20,000
What is the value of the initial shortage of apartments with rent control?
Now assume rent control leads to a reduction in the supply of apartments, and the new quantity supplied is now 15,000. Illustrate this on your graph.
What is the value of the shortage of apartments following the decrease in supply?
What will be an ideal response?
The initial shortage of apartments is (50,000 - 20,000 ) = 30,000.
The reduction in supply is shown by the shift from S1 to S2.
The shortage following the decrease in supply is (50,000 - 15,000 ) = 35,000.
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