Question

Question 1 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 (a) Graph the market demand function for apartments in Alpha. (b) There are only seven apartments available to the market in the short run. What is the equilib- rium price in the market for apartments in Alpha? (c) (i) With seven apartments available, which of the consumers of apartments in Alpha will obtain apartments? (ii) What is your answer to (i) if water damage led the supply of apartments to decrease to only five?

          Question 1
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
(a) Graph the market demand function for apartments in Alpha.
(b) There are only seven apartments available to the market in the short run. What is the equilib-
rium price in the market for apartments in Alpha?
(c) (i) With seven apartments available, which of the consumers of apartments in Alpha will obtain
apartments? (ii) What is your answer to (i) if water damage led the supply of apartments to
decrease to only five?

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