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Homework answers / question archive /  Consider twn students who think about rent- ing an inner ring (IR) apartment in College Town

 Consider twn students who think about rent- ing an inner ring (IR) apartment in College Town

Economics

 Consider twn students who think about rent- ing an inner ring (IR) apartment in College Town. Their reservation prices (in no particular order) are 320, 280, 380, 420, 240, 380, 260,440,480, and 400 respec- tively. Suppose the supply of IR apartments is fixed at N = 6, and all landlords have reservation prices of zero. a) Plot an ordered list of the students' RPs in a diagram. b) Plot the market demand curve, and the market supply curve in a diagram. Explain why your plot in a) is identical (except for the labelling of the vertical axis) to your demand plot in b) c) Find the market equilibrium. How many IR apartments are rented out in a competitive equilibrium? To whom? At which price(s)? Explain. d) Suppose the supply of IR apartments increases to N = 8. How does the equilibrium change? (Use a graph to find the solution). Question 2 (Continuation of Q1) Let again N = 6, and suppose that 2 of those IR apartments are converted into condos. How does the equilibrium in the IR rental market change if (a) both condos are bought by investors, who rent them out to retired alumni of Prairie College. (b) both condos are bought by students for their own use one of these students has a RP of 300, the other a RP of 420. (c) same as (b), but the two students have RPS of 380 and 480, respectively. (c) both condos are bought by a student with an RP of 280, one for her own use, the other for her parents' use. Graph each of these situations in a diagram, find the market equilibria, and explain.

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a) Ordered list of student reservation prices, respresenting quantity on the X-axis and reservation prices for the apartments on the Y axis

b) The market demand curve and the market supply curve will be the same except that on the Y-axis,i.e. the vertical axis will be represented by the price .

From the demand side we have two students whose demand is 1 apartment, which represents the total market demand and the supply of apartment is fixed at 6 which represents the total supply of the market and the lanlords have no reservation price.

c) Competitive equlibrium is a condition in which the producers and consumers are satisfied in the sense that producers profit is maximised and consumers utility is maximized.

Since the market demand is only 1 apartment and the market supply is 6 apartments, the equilibrium will be at quantity 1. This is a low demand market and no competition.as the landlords does not charge a reservation price and hence we cannot fulfil the conditions of a competitive market equilibrium. Only 1 apartment is rented out to the two students. We cannot say anything about a particular price given by the students  here as all landlords have zero reservation prices. It can be 240, 260,280,320,380,440 or 480 unit per apartment.

d) The equilibrium does not change as there the demand remains the same.


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