For each problem, answer the question in words and graphically. Try to explain things so that someone unfamiliar with economics could understand.
Part II: Assume that New York City’s economy has made a comeback. That and other trends have resulted in more rich people and more extremely rich people in New York City (NYC). However, assume that at the same time income inequality has increased so much that people at the very bottom become worse off. If you decide to make any assumptions in order to answer the questions, make sure that your assumptions are reasonable and noted in your answers. Discuss changes in price and quantity.
1. What has the booming economy done to the market for renting apartments in NYC? Illustrate in a supply and demand diagrams from before the boom (= initial state) to during the boom (= final state). Explain in words what effect the boom had and why.
2. Remember that with a supply and demand analysis, the product being analyzed can be defined with many levels of aggregation. Now disaggregate the market for renting apartments and consider the effects of the booming economy markets on luxury apartments and on “bare bones” apartments separately. (Assume there are also middle range apartments but ignore them in your analysis.) For now, consider justthe direct effects of the NYC economy on each. Illustrate in two side-by-side supply-and-demand diagrams (one for luxury, one for bare bones) and explain in words.
3. Now consider how the two real estate markets - luxury apartments and bare bones apartments – interact. Given what you found about how prices change in problem 2, how do you think landlords will react and what will happen to the supply of rental housing in each market? Again, illustrate in two side-by-side supply-and-demand diagrams and explain in words.
4. Now consider the labor market for cleaners and other who work in service for the rich. How will that labor market have been affected by the growing ranks of the very wealthy in NYC? Describe in words and illustrate in a supply-and-demand diagram for service labor, both before (= initial state) and during the boom (= final state).
5. Now consider how the effects of the service labor market have affected the market for bare bones apartments. Illustrate in a supply-and-demand diagram and explain in words.
6. Illustrate in a composite diagram for the market for bare bones apartments, the combined effects of (2), (3) and (5), showing both before (= initial state) and during the boom (= final state). Explain your diagram in word.