Imagine you are an economic consultant for the city of Storrs. The city council has asked you to predict how building new apartments in downtown will influence the price and quantity of housing. For starters assume there are only nine individuals who would potentially be interested in renting apartments in downtown Storrs. These individuals are labeled via letters: A - I. The individuals are listed with their willingness to pay for an apartment below them:
Individual: A B C D E F G H I
Willingness to pay: $30 $60 $80 $10 $20 $5 $90 $50 $0
Also assume that there currently only 4 apartments that are available and it would take a considerable amount of time to either build a new apartment or bulldoze one of the old ones.
1. a. Use the willingness to pay information above to graph the Demand curve for apartments in Storrs:
b. Why is the demand curve not a straight line like it is in most demand/supply analysis?
c. Add the supply curve to your above graph. Briefly discuss the shape of the supply curve and what assumptions make it look the way it does.
d. What is the equilibrium price for renting an apartment in downtown Storrs (Hint: this will be a range of prices rather than a single price)?
e. Assume that one of the apartments is bulldozed, reducing the supply of apartments to 3.What is the new equilibrium price of apartments?
f. Now, assume we are back to having 4 apartments. Suppose individual H decides not to rent an apartment and instead stays at a Uconn dorm. What happens to the equilibrium price?
g. Now assume we are back to four apartments and all of the original renters. Suppose one of the apartments is bulldozed and a house is built. Persons B and H then jointly rent the house. What happens to equilibrium prices?
h. Again, assume we are back to four apartments and all of the original renters. The city council of Storrs is considering applying a tax on apartments. It would be most efficient for them to apply the tax directly to renters. However, they are concerned about causing a financial burden to the relatively low income population of renters. What would happen to equilibrium price if they applied a $5 tax? As a consultant, would you advise the city council that their concerns about causing a financial burden to renters are well founded? Would you instead recommend that they apply the tax directly to landlords? Why or why not?
i. Suppose the city council of Storrs is interested in reducing the price of housing for the low income population. To this end they issue housing vouchers to our renters such that they can exchange the voucher for $5 off rent. Does this affect the equilibrium price? If so, how? Is this policy effective at reducing the cost of housing?