Consider a housing market in which the rental properties are owned by 10 price-taking companies. The cost function for each company is..
0 if q < 10 oo if q > 10.
That is. each company can offer any quantity up to its available rental space 10 at. no cost. but it cannot offer any more than 10.
Suppose the market demand is given by
1000 — p D(p) = 10
ifp<1000. if p> 1000.
(a) Find the aggregate supply function and illustrate it in a diagram. then Calculate the (short-run) competitive equilibrium quantity and price and illustrate your solution in your diagram. Determine the point-price elasticities of demand and supply and state whether at the equilibrium price, they are elastic or inelastic.
Suppose the government imposes a 20% value added tax on rent. Calculate the equilibrium supply of housing, and determine the price paid by tenants and the price received by housing companies in equilibrium. Does the tax hurt tenants or create a dead-weight loss? Explain your answer!
Sample Solution