drop box number 4 - 21254

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Properties in the city of Mumbai (formerly Bombay) in India are still subject to rent-control regulations that were imposed in 1947. At that time, thousands of people migrated into Mumbai as a result of the partition of the country into India and Pakistan. Rents were frozen at levels that prevailed in 1940, in order to prevent spikes in rental rates that might have resulted from this rapid increase in demand for housing. The questions below ask you to analyze the motivation and the consequences of rent control laws. All quotes are taken from a 2006 Wall Street Journal article. (Bellman, Eric. “Tenants in Mumbai Will Endure a Lot For an $8.50 Flat; Why Sojatwala Family Stayed In Rent-Controlled Digs After a Building Collapse”, Wall Street Journal. Jun 5, 2006. pg. A.1.)

Why should the landlords improve their properties? They don’t have enough cash flow generated from the apartments/homes to do the needed improvements.   If the rent control was removed from the regulated properties, the end game would not raise the prices like others would believe they would not to the price as the unregulated sector. The overall equilibrium price would be lower than $3000.00. This would fall under supply and demand. 

c. In Mumbai, “the rent-control measures, that were meant to be temporary, have been extended more than 20 times and currently apply to roughly 35,000 buildings, or about 60 percent of the real-estate market in the city center, the property owners association says.” Explain why elected officials would choose, repeatedly, to extend a regulation that causes egregious misallocation of resources. (Hint: Consider this quote from the same article: “Unlike China, where residents regularly make way for new skyscrapers, the beneficiaries of Mumbai's rent controls flex political muscle to stay.”) (25 pts.)

2.  Why might it be rational for a consumer who prefers an expensive Cadillac Escalade to a less expensive Honda, ends up actually purchasing the Honda? (25 pts.)

 

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Drop box number 4

·         Properties in the city of Mumbai (formerly Bombay) in India are still subject to rent-control regulations that were imposed in 1947. At that time, thousands of people migrated into Mumbai as a result of the partition of the country into India and Pakistan. Rents were frozen at levels that prevailed in 1940, in order to prevent spikes in rental rates that might have resulted from this rapid increase in demand for housing. The questions below ask you to analyze the motivation and the consequences of rent control laws. All quotes are taken from a 2006 Wall Street Journal article. (Bellman, Eric. “Tenants in Mumbai Will Endure a Lot For an $8.50 Flat; Why Sojatwala Family Stayed In Rent-Controlled Digs After a Building Collapse”, Wall Street Journal. Jun 5, 2006. pg. A.1.)

a. The author points out that the result of the rent control law in Mumbai is that “landlords are leaving prime parcels of property to decay. The dearth of new apartments means that half of the city 12 million residents live in slums.” Explain the economic logic of this outcome. (25 pts.)