Chapter 4

The market for rice has the following supply and demand schedules: $$\begin{array}{ccc}P(\text{ per ton })& Q^D\text{ (tons) }& Q^s\text{ (tons) }\\ \mathrm{\$}10& 100& 0\\ \mathrm{\$}20& 80& 30\\ \mathrm{\$}30& 60& 40\\ \mathrm{\$}40& 50& 50\\ \mathrm{\$}50& 40& 60\end{array}$$ To support rice producers, the government imposes a price floor of $\mathrm{\$}50$ per ton. a. What quantity will be traded in the market? Why? b. What steps might the government have to take to enforce the price floor?

In the chapter, you learned that one way the government enforces agricultural price floors is to buy up the excess supply itself. If the government wanted to follow a similar kind of policy to enforce a price ceiling (such as rent control), and thereby prevent black market-type activity, what would it have to do? Is this a sensible solution for enforcing rent control? Briefly, why or why not?

State whether each of the following is a stock variable or a flow variable, and explain your answer briefly. a. Total farm acreage in the U.S. b. Total spending on food in China c. The total value of U.S. imports from Europe d. Worldwide iPhone sales e. The total number of parking spaces in Los Angeles f. The total value of human capital in India g. Investment in new human capital in India

Every year, the housing market in Monotone, Arizona, has the same experience: The demand curve for housing shifts rightward by 500 homes, 500 new homes are built, and the price of the average home doesn't change. Using supply and demand diagrams, illustrate how each of the following new events, ceteris paribus, would affect the price of homes in Monotone during the current year, and state whether the price rises or falls. a. Because of special tax breaks offered to Monotone home builders, 800 new housing units are built during the current year. b. Because of events in the overall economy, interest rates fall. c. The Monotone city council passes a new zoning law that prevents any new home construction in Monotone during the year. d. Because of the new zoning law, and the resulting change in home prices, people begin to think that homes in Monotone are a better investment than they had thought before. e. 500 new homes are built in Monotone during the year, but that same year, an earthquake destroys 2,000 preexisting homes. As a result of the earthquake, 3,000 homeowners decide they no longer want to live or own homes in Monotone.

Every year in Houseville, California, builders construct 2,000 new homes-the most the city council will allow them to build. And every year, the demand curve for housing shifts rightward by 2,000 homes as well. Using supply and demand diagrams, illustrate how each of the following new events, ceteris paribus, would affect the price of homes in Houseville during the current year, and state whether home prices would rise or fall. a. Houseville has just won an award for the most livable city in the United States. The publicity causes the demand curve for housing to shift rightward by 5,000 this year. b. Houseville's city council relaxes its restrictions, allowing the housing stock to rise by 3,000 during the year. c. An earthquake destroys 1,000 homes in Houseville. There is no affect on the demand for housing, and the city council continues to allow only 2,000 new homes to be built during the year. d. The events in a., $b.,$ and $c.$ all happen at the same time.

[Requires appendix] Suppose you buy a home for $\mathrm{\$}400,000$ with a $\mathrm{\$}100,000$ down payment and finance the rest with a home mortgage. a. Immediately after purchasing your home, before any change in price, what is the value of your equity in the home? b. Immediately after purchasing your home, before any change in price, what is your simple leverage ratio on your investment in the home? c. Now suppose that over the next three years, the price of your home has increased to $\mathrm{\$}500,000$ Assuming you have not borrowed any additional funds using the home as collateral, but you still owe the entire mortgage amount, what is the new value of your equity in the home? Your new simple leverage ratio? d. Evaluate the following statement: "An increase in the value of a home, with no additional borrowing, increases the degree of leverage on the investment in the home." True or false? Explain.

[Requires appendix] Suppose, as in the previous problem, you buy a home for $\mathrm{\$}400,000$ with a down payment of $\mathrm{\$}100,000$ and take out a mortgage for the remainder. Over the next three years, the price of the home rises to $\mathrm{\$}500,000.$ However, during those three years, you also borrow $\mathrm{\$}50,000$ in additional funds using the home as collateral (called a "home equity loan"). Assume that, at the end of the three years, you still owe the $\mathrm{\$}50,000$ as well as your original mortgage. a. What is your equity in the home at the end of the three years? b. How many times are you leveraged on your investment in the home at the end of the three years? c. By what percentage could your home's price fall (after it reaches $\mathrm{\$}500,000$ ) before your equity in the home is wiped out?

[Requires appendix] Could any combination of home price, mortgage, or further borrowing on a home result in a simple leverage ratio of $1/2?$ If yes, provide an example. If no, briefly explain why.