Economics Apartment Question: Inner and Outer Ring
Let us infer a few things from your question which will help us in subparts of the question.
a) The person who lives in the inner-ring apartment will have low transportation cost than the one who lives in the outer-ring apartment. The reason is as we move from inner-ring apartment to outer-ring one cost of transportation increases.
b) For the inner ring apartment, the demand of the apartment is greater than supply, hence renter has to pay higher rent than the outer-ring apartment.
c) Maximum willingness to pay for the inner-ring apartment can be written as
willingness to pay = i.e; rent of the outer-ring apartment + cost of transportation.
For maximum willingness; = 1, hence the above equation became .
It depends on the rent of outer-ring apartment and scaling parameter.
d) If a person is indifferent between apartments it means his maximum willingness to pay matches the equation we derive in the above part.
Therefore, the maximum willingness to pay is 1000+ 1000 = $ 2000.
Hence, option (v) is correct.
e) The demand function for inner ring apartment; =
This is the demand function because demand negatively related to the price of inner ring apartment and positively related to outer ring apartment.
f) If we assume a competitive market then equilibrium exists where the demand of apartment is equal to the supply of apartment.
g) From the equation, we derive in part (e); putting the respective values
1000 = (1000+1000) - p
gives, p = 1000
At equilibrium, Demand = Supply, p-1000 = 500
which gives
Rent for the inner ring apartment is p = 1000 * (1/2) = $500
Rent for the outer ring apartment = $ 1000 and $500 for transportation.
h) The voluntary trade at and is not possible because at this
rent of the outer-ring apartment = 1000 + 250 = $1250; at ; rent of outer-ring apartment = $1750
rent of inner-ring apartment = 1000*(0.25) = $250 ; at ; rent of inner-ring apartment = $ 750
because it creates large gap between what they are paying versus what they have to pay after trade,
Economics Apartment Question: Inner and Outer Ring » There are two types of apartments, inner ring...
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