Question

Suppose that, prior to the passage of the Truth in Lending Simplification Act and Regulation the demand for consumer loans was given by ${\mathrm{Q}}_{\mathrm{pre}-\mathrm{TILSA}}^{\mathrm{d}}$=12-100 P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was ${\mathrm{Q}}_{\mathrm{pre}-\mathrm{TILSA}}^{\mathrm{S}}=5+100\mathrm{P}$(in billions of dollars). The TILSA now requires lenders to provide consumers with complete information about the rights and responsibilities of entering into a lending relationship with the institution, and as a result, the demand for loans has increased to${\mathrm{Q}}_{\mathrm{post}-\mathrm{TILSA}}^{\mathrm{d}}=18-100\mathrm{P}$ (in billions of dollars). However, the TILSA also imposed "compliance costs" on lending institutions, and this reduced the supply of consumer loans to${\mathrm{Q}}_{\mathrm{post}-\mathrm{TILSA}}^{\mathrm{S}}=3+100\mathrm{P}$ (in billions of dollars). Based on this information, compare the equilibrium price and quantity of consumer loans before and after the Truth in Lending Simplification Act.

Short answer

We can clearly see that the Truth in Lending Simplification Act led to an Increase In both equilibrium price and quantity.

$\begin{array}{l}{\text{P}}_{\text{pre-TILSA}}<{\text{P}}_{\text{post-TILSA}}0.035<0.075\\ {\text{Q}}_{\text{pre-TILSA}}<{\text{Q}}_{\text{post-TILSA}}8.5<10.5\end{array}$

Step-by-step solution

To find the equilibrium quantity before the truth in lending simplification

To establish the equilibrium price and quantity, we must find at which point is the supplied quantity equal to the demanded quantity.

$\begin{array}{c}{Q}_{pre-TILSA}^d=Q_{pre-TILSA}^S\\ 12-100\text{P}=5+100P\\ 200\text{P}=7\\ {\text{P}}_{pre-TILSA}=0.035\end{array}$

$\begin{array}{c}{P}_{\text{pre-TILSA}}=0.035\\ Q=12-\left(100\times 0.035\right)\\ {\text{Q}}_{\text{pre-TILSA}}=8.5\end{array}$

Thus, equilibrium quantity before the Truth in Lending Simplification Act was 8.5 loans for the price of $35 million.

To find the equilibrium quantity after the truth in lending simplification

To find post-TILSA equilibrium we will use the same formula as in the previous step but now with different functions of supply and demand.

$\begin{array}{c}{Q}_{post-TILSA}^d=Q_{post-TILSA}^S\\ 18-100P=3+100\\ =200\text{P}=15\\ P_{post-TILSA}=0.075\\ Q=18-\left(100\times 0.075\right)\\ Q_{post-TILSA}=10.5\end{array}$

Thus, equilibrium quantity after the Truth in Lending Simplification Act was 10.5 loans for the price of $75 million.