Incentives and outcomes

    The diagrams below illustrate an initial equilibrium in the market for rental apartments.

    Suppose that a law is passed requiring landlords to give tenants 6-months notice before eviction. This provision in rental agreements is nonwaivable, so it binds all rental agreements.

Case 1: The value of the new provision to tenants is $120 per month. The cost of the new provision to landlords is $60 per month.	Case 2: The value of the new provision to tenants is $60 per month. The cost of the new provision to landlords is $120 per month.
Step 1: Carefully diagram the results.	Step 1: Carefully diagram the results.
Step 2: How much did the equilibrium price change?          DP = ______	Step 2: How much did the equilibrium price change?          DP = ______
Step 3: Rank the following from high to low: change in benefit (DB), change in cost (DC), and change in equilibrium price (DP):         ______ > ______ > ______	Step 3: Rank the following from high to low: change in benefit (DB), change in cost (DC), and change in equilibrium price (DP):         ______ > ______ > ______

    Step 4: Decide which of the following you would consider to be most common for legislated contract provisions of this sort:
    (1) Case 1 is more likely than Case 2.
    (2) Case 2 is more likely than Case 1.
    (3) Both cases are equally likely.
    (4) It is impossible to conclude which case is more likely.

    Step 5: Briefly explain your decision in Step 4.