Multiple Choice
When there is an excess demand for a good, which of the following is most likely to occur in a competitive market?
2
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3. The Market Forces of Supply and Demand
Effects of Shortage
Multiple Choice
A city imposes a binding rent ceiling on apartments built before 1990. In the short run with a fixed number of units, what is the most likely effect on the quantity of apartments traded?
A
Decreases because landlords withdraw apartments from the market, reducing the number traded.
B
Falls to zero as landlords stop renting out apartments under the ceiling.
C
Remains unchanged at the fixed number of existing units, creating a shortage (excess demand).
D
Increases because the lower rent attracts more renters and raises the number of transactions.
Verified step by step guidance1
Step 1: Understand the concept of a binding rent ceiling. A binding rent ceiling is a legal maximum price set below the market equilibrium rent, which prevents landlords from charging higher rents.
Step 2: Recognize that in the short run, the number of apartments (supply) is fixed because it takes time to build or remove housing units. Therefore, the quantity of apartments available does not change immediately.
Step 3: Analyze the effect of the rent ceiling on quantity traded. Since the rent is artificially kept below equilibrium, demand for apartments increases, but supply cannot increase in the short run due to fixed units.
Step 4: Conclude that the quantity of apartments traded remains unchanged at the fixed number of existing units because landlords cannot supply more apartments immediately, even though demand rises.
Step 5: Understand that this situation creates a shortage (excess demand) because more renters want apartments at the lower rent than there are apartments available.
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