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
Question 4
With five apartments available in Alpha, suppose that the government set a price ceiling of $1, 000
for apartments, in response to cost of living concerns, and that only Alvin, Byron, Calvin, Damon
and Eamon manage to obtain apartments because they have social connections to the landlords.
(a) Suppose that sub-letting is impossible. Is the allocation above Pareto Efficient? Explain.
(b) Now suppose that a secondary market for apartment rentals emerges in Alpha, in which con-
sumers with apartments rent them to other households at any price. What is the equilibrium
price in the secondary market for apartments in Alpha? Explain.
(c) At the equilibrium price you solved for in part (b), which consumers who have apartments
would sell them in the secondary market, and which consumers who do not have apartments
would buy them? Explain