# Varian Solution

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Chapter 1

NAME

The Market
Introduction. The problems in this chapter examine some variations on the apartment market described in the text. In most of the problems we work with the true demand curve constructed from the reservation prices of the consumers rather than the “smoothed” demand curve that we used in the text. Remember that the reservation price of a consumer is that price where he is just indiﬀerent between renting or not renting the apartment. At any price below the reservation price the consumer will demand one apartment, at any price above the reservation price the consumer will demand zero apartments, and exactly at the reservation price the consumer will be indiﬀerent between having zero or one apartment. You should
Further suppose that people A, B, C, D, and E manage to get an apartment, while F, G, and H are frozen out.

4

THE MARKET

(Ch. 1)

(a) If subletting is legal—or, at least, practiced—who will sublet to whom in equilibrium? (Assume that people who sublet can evade the city rentcontrol restrictions.)

E, who is willing to pay only F,

\$10 for an apartment would sublet to who is willing to pay \$18.

(b) What will be the maximum amount that can be charged for the sublet payment?

\$18. A,

(c) If you have rent control with unlimited subletting allowed, which of the consumers described above will end up in the 5 apartments?

B, C, D, F.
(d) How does this compare to the market outcome?

It’s the

same.
1.5 (2) In the text we argued that a tax on landlords would not get passed along to the renters. What would happen if instead the tax was imposed on renters? (a) To answer this question, consider the group of people in Problem 1.1. What is the maximum that they would be willing to pay to the landlord if they each had to pay a \$5 tax on apartments to the city? Fill in the box below with these reservation prices. Person Reservation Price A B C D E F G H

35

20

25

30

5

13

10

0

(b) Using this information determine the maximum equilibrium price if there are 5 apartments to be rented.

\$13.

(c) Of course, the total price a renter pays consists of his or her rent plus the tax. This