Question

6. Reservation Prices Suppose that we have 8 people who want to rent an apartment. Their reservation prices are given below. (To keep the numbers small, think of these numbers as being daily payments.) Person = A B C D E F G H Price = 40 25 30 35 10 18 15 5 a) Suppose that the supply of apartments is fixed at 5 units. In this case there is a whole range of prices that will be equilibrium prices. What is the highest price that would make the demand for apartments equal to 5? b) What is the lowest price that would make the demand for apartments equal to 5? c) With a supply of 4 apartments, which of the people A-H end up getting the apartment? Explain.

Answer 1

Arrange the reservation price in descending order

Person	Price
A	40
D	35
C	30
B	25
F	18
G	15
E	10
H	5

a)

A person will rent apartment if supply price is less than or equal to reservation price.

Above table indicates that, quantity demanded for apartment will be 5 at a maximum daily rent of $18. If price is higher than $18, quantity demanded will be less than 5.

b)

We can see that 6th person(G) will rent apartment if maximum price is $15. It means that demand will be 5 for any price higher than 15. We can say approximately say that minimum price is $15.01

c)

Refer to above table,

If supply is limited to 4, first 4 persons in above ascending ordered will get the apartment.   

A, B, C and D