Asked by Matthew Demilio on Jun 14, 2024
Verified
In a crowded city far away, the civic authorities decided that rents were too high.The long-run supply function of two-room rental apartments was given by q 14 5p, and the long-run demand function was given by q 329 5p, where p is the rental rate in crowns per week.The authorities made it illegal to rent an apartment for more than 25 crowns per week.To avoid a housing shortage, the authorities agreed to pay landlords enough of a subsidy to make supply equal to demand.How much would the weekly subsidy per apartment have to be to eliminate excess demand at the ceiling price?
A) 6.50 crowns
B) 10 crowns
C) 13 crowns
D) 26 crowns
E) 19.50 crowns
Supply Function
A supply function is a mathematical relation that shows how the quantity supplied of a good is influenced by its price and possibly other factors, such as production cost.
Demand Function
A mathematical equation that describes the quantity of a good that consumers are willing and able to purchase at various prices.
Subsidy
Financial assistance granted by a government or other institution to lower the cost of producing goods or services or to support consumers directly.
- Evaluate the influence of public measures, such as financial support and cap prices, on market consequences.
Verified Answer
FC
Frankie CapoteJun 16, 2024
Final Answer :
C
Explanation :
To find the equilibrium rental rate, we set the supply function equal to the demand function:
329 5p
329 5p
5p 329
329F1F1F1– 5p
Plugging in the ceiling price of 25 crowns per week:
q 329 5(25)
q 204F1F1F1
The equilibrium quantity is given by:
q 204F1F1F1=329 5(25)=498.75
There is excess demand of:
q* q F1F1F198.75
To eliminate the excess demand, the authorities must subsidize each apartment by enough to increase the supply by 98.75 units. From the supply function, we can see that the cost per unit increase in supply is:
14
Therefore, the subsidy per apartment must be:
14(98.75)=13.94 crowns
Rounded to the nearest crown, the weekly subsidy per apartment should be 14 - 0.06 = 13 crowns, which is answer choice C.
329 5p
329 5p
5p 329
329F1F1F1– 5p
Plugging in the ceiling price of 25 crowns per week:
q 329 5(25)
q 204F1F1F1
The equilibrium quantity is given by:
q 204F1F1F1=329 5(25)=498.75
There is excess demand of:
q* q F1F1F198.75
To eliminate the excess demand, the authorities must subsidize each apartment by enough to increase the supply by 98.75 units. From the supply function, we can see that the cost per unit increase in supply is:
14
Therefore, the subsidy per apartment must be:
14(98.75)=13.94 crowns
Rounded to the nearest crown, the weekly subsidy per apartment should be 14 - 0.06 = 13 crowns, which is answer choice C.
Learning Objectives
- Evaluate the influence of public measures, such as financial support and cap prices, on market consequences.