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 2
Suppose there are initially 7 apartments but that one of the consumers inherits an apartment from
a previous owner on the condition that the inheritor must live in that apartment.
(a) (i) For each of the individual consumers, find the equilibrium price when that consumer is
the one who inherits an apartment and show your answer in a demand/supply diagram for the
pertinent cases. (ii) What does your answer tell you about the determinants of equilibrium
price? (iii) Explain the nature of this ‘comparative statics’ thought experiment and why care
must be taken when evaluating real-world changes in a market.
(b) Suppose that there are two consumers for each reservation price. You can think of this as each
person having an identical twin with the same reservation price. Suppose also the supply of
apartments is 10 in total. What is the equilibrium price in this situation? Show your answer in
a demand/supply diagram.
(c) Consider the equilibrium price you found in part (b). Would this still be an equilibrium price
if one of the consumers of apartments in Alpha inherited and lived in one of the apartments?
Explain with reference to your diagram.