Officials in a college town are concerned about the "exploitative" rents being charged to college students. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the town. An economist at the university estimates the demand and supply curves as: QD = 5600 - 8P QS = 500 + 4P where P is monthly rent, and Q is the number of apartments available for rent. For purposes of this analysis, all apartments can be treated as identical.
(a) Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both).
(b) What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in consumer and/or producer surplus.
(c) Does the proposed rent ceiling result in net welfare gains? Would you advise the town council to implement the policy?