Question

Consider 9 consumers who constitute the entire market for studio, i.e. single person, apartments— hereafter referred to as simply ‘apartments’—in the small village of Alpha: Alvin, Byron, Calvin, Damon, Eamon, Franklin, Galen, Haydon and Ivan. Their reservation prices for apartments are summarised in the table below. The town of Alpha is as described in chapter 1 of Varian, i.e. the reservations prices refer to apartments in the inner ring, and there is an outer ring of less desirable apartments available at an exogenous price. Assume that any landlord who sells to the marginal buyer is able to charge that buyer’s reservation price, even though that buyer becomes indifferent between inner and outer apartments. Consumer Reservation price ($) Alvin 4,000 Byron 1,300 Calvin 4,500 Damon 2,200 Eamon 3,500 Franklin 1,700 Galen 2,900 Haydon 1,400 Ivan 3,900 Return to the market consisting of the original 9 consumers. Suppose now that Rich establishes a monopoly over the market for apartments in Alpha. Rich has a stock of at least 7 apartments and does not have any cost associated with selling 7 or fewer units. (a) Assume that Rich may only set one price for apartments. For each possible number of apartments, find the maximum price that Rich could set to sell that many apartments in Alpha, and the revenue Rich makes from selling that many apartments, at that maximum price. (b) (i) How many apartments would Rich choose to sell, and at what price? (ii) Which consumers would obtain these apartments? (iii) Compare your answer to that of question 1 (b) and explain. (c) Now suppose every apartment that Rich supplies can be sold at a different price. Compare the outcome to the competitive equilibrium. Explain.

Consider 9 consumers who constitute the entire market for studio, i.e. single person, apartments—
hereafter referred to as simply ‘apartments’—in the small village of Alpha: Alvin, Byron, Calvin,
Damon, Eamon, Franklin, Galen, Haydon and Ivan. Their reservation prices for apartments are
summarised in the table below. The town of Alpha is as described in chapter 1 of Varian, i.e. the
reservations prices refer to apartments in the inner ring, and there is an outer ring of less desirable
apartments available at an exogenous price. Assume that any landlord who sells to the marginal
buyer is able to charge that buyer’s reservation price, even though that buyer becomes indifferent
between inner and outer apartments.
Consumer Reservation price ($)
Alvin 4,000
Byron 1,300
Calvin 4,500
Damon 2,200
Eamon 3,500
Franklin 1,700
Galen 2,900
Haydon 1,400
Ivan 3,900

Return to the market consisting of the original 9 consumers. Suppose now that Rich establishes a
monopoly over the market for apartments in Alpha. Rich has a stock of at least 7 apartments and
does not have any cost associated with selling 7 or fewer units.
(a) Assume that Rich may only set one price for apartments. For each possible number of apartments, find the maximum price that Rich could set to sell that many apartments in Alpha, and
the revenue Rich makes from selling that many apartments, at that maximum price.
(b) (i) How many apartments would Rich choose to sell, and at what price? (ii) Which consumers
would obtain these apartments? (iii) Compare your answer to that of question 1 (b) and explain.
(c) Now suppose every apartment that Rich supplies can be sold at a different price. Compare the
outcome to the competitive equilibrium. Explain.

Added by 家辉张.

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