Apartment Market Allocation and Efficiency

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Questions and Answers

What is the outcome of a competitive market in terms of efficiency?

  • It achieves Pareto efficiency. (correct)
  • It results in excess demand.
  • It leads to deadweight loss.
  • It is not efficient at all.

What distinguishes the discriminating monopolist from the competitive market?

  • It assigns apartments to the same individuals as in a competitive market. (correct)
  • It charges everyone the same price.
  • It allocates apartments differently than the competitive market.
  • It leads to higher total welfare for consumers.

How does a discriminating monopolist impact the distribution of income compared to a competitive market?

  • Equalizes the distribution of income among consumers.
  • Makes consumers better off than in a competitive market.
  • Does not affect the distribution of income.
  • Makes consumers worse off than in a competitive market. (correct)

Why is the ordinary monopolist's pricing strategy not Pareto efficient?

<p>Not all apartments are rented out at positive prices. (B)</p> Signup and view all the answers

What is a Pareto improvement in the context of the monopolist's pricing?

<p>Making both the monopolist and a renter better off without hurting others. (C)</p> Signup and view all the answers

What scenario describes a situation that is not Pareto efficient under rent control?

<p>An arbitrary assignment of renters results in mismatched prices. (B)</p> Signup and view all the answers

Which of the following is true about a Pareto efficient outcome?

<p>It only addresses the allocation of resources, not their distribution. (D)</p> Signup and view all the answers

In the case of first-degree price discrimination, how does the landlord benefit?

<p>They can extract more consumer surplus. (C)</p> Signup and view all the answers

What does the equilibrium price $p^*$ represent in the apartment market?

<p>The price at which the quantity of apartments demanded equals the quantity supplied (D)</p> Signup and view all the answers

How does the market determine who gets an apartment in the inner ring?

<p>By evaluating the maximum amount each renter is willing to pay (B)</p> Signup and view all the answers

What occurs when the supply of apartments increases?

<p>The equilibrium price decreases, leading to more renters getting inner-ring apartments (B)</p> Signup and view all the answers

What characterizes the concept of comparative statics?

<p>Focusing on the changes in equilibrium without considering time (D)</p> Signup and view all the answers

What happens to a renter with a reservation price at $p^*$?

<p>They are indifferent between an apartment in the inner ring and one in the outer ring (D)</p> Signup and view all the answers

In the context of the inner-ring apartments, what is a significant consequence of price discrimination?

<p>Renters with higher willingness to pay can secure apartments more effectively (C)</p> Signup and view all the answers

Why might a renter choose an outer-ring apartment?

<p>They may have a lower reservation price than the equilibrium price (D)</p> Signup and view all the answers

What is the primary focus of the tenants' behavior at equilibrium price $p^*$?

<p>Aligning their demand with the supply provided by landlords (A)</p> Signup and view all the answers

What is the primary characteristic of a discriminating monopolist in the context of renting apartments?

<p>They charge different prices to different renters based on their willingness to pay. (D)</p> Signup and view all the answers

In a scenario where a discriminating monopolist rents apartments, what typically happens to the price paid by renters as taxes change?

<p>The price paid by renters is likely to change. (D)</p> Signup and view all the answers

How does the allocation of apartments by a discriminating monopolist compare to that in a competitive market?

<p>Both methods result in the same individuals receiving apartments, despite price differences. (D)</p> Signup and view all the answers

What is a key assumption made about the discriminating monopolist's pricing strategy?

<p>They can auction apartments individually based on knowledge of reservation prices. (B)</p> Signup and view all the answers

What determines the price each renter pays under a discriminating monopolist?

<p>Each renter's maximum willingness to pay for an apartment. (B)</p> Signup and view all the answers

Which of the following statements is true about the last person renting an apartment from a discriminating monopolist?

<p>They pay the equivalent of the competitive market equilibrium price. (A)</p> Signup and view all the answers

What does the discriminating monopolist aim to maximize by renting apartments at different prices?

<p>His or her own profits by differentiating prices. (B)</p> Signup and view all the answers

Which scenario best describes first-degree price discrimination in renting apartments?

<p>Charging different prices based on individual willingness to pay, maximizing total revenue. (B)</p> Signup and view all the answers

Flashcards

Discriminating Monopolist

A single landlord (or group acting as one) who rents apartments to the highest bidder, charging a different price for each.

Monopoly

A market situation where a single seller controls the entire supply of a product or service.

Competitive Market Apartment Allocation

Apartments are allocated based on supply and demand, where the price is the same for every apartment.

Reservation Price

The maximum price a consumer is willing to pay for a good or service.

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Equilibrium Price (p*) for Apartments

The price at which the quantity demanded of apartment rentals equals the quantity supplied.

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Ordinary Monopolist

A monopolist who is restricted from charging different prices to different buyers.

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Apartment Allocation

The method used to determine who gets apartments and at what price.

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Market Solution

Apartments allocated based on competitive market forces (supply and demand).

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Equilibrium Price (Apartments)

The price at which the quantity of apartments demanded by renters equals the quantity supplied by landlords.

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Inner-Ring Apartments

Apartments located closer to the city center.

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Outer-Ring Apartments

Apartments located farther from the city center.

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Apartment Assignment

The process of allocating apartments to renters based on their reservation prices.

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Comparative Statics

Analyzing how equilibrium changes when aspects of the market change without considering transitions.

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Increased Apartment Supply

An increase in the number of available apartments.

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Market Equilibrium

A state of balance in the market for apartments where supply and demand are equal at the equilibrium price.

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Pareto Efficiency

A market outcome where no one can be made better off without making someone else worse off.

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Competitive Market

Market where many buyers and sellers interact freely, leading to a single equilibrium price.

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Monopolist (ordinary)

Single seller in a market who sets the price.

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Pareto Improvement

A change that makes at least one person better off without harming anyone else.

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Rent Control

Government regulation that limits the amount landlords can charge for rent.

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Long-run equilibrium

A market equilibrium where all market participants (buyers and sellers) have no incentive to adjust their actions.

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Study Notes

Apartment Market Allocation

  • Competitive Market Equilibrium: In a competitive apartment market, equilibrium is reached when the quantity demanded equals the quantity supplied at a price (p*). All those willing to pay p* or more get an apartment in the inner ring, others get apartments further away.

Different Allocation Methods

  • Discriminating Monopolist: A single landlord (or group of coordinated landlords) can rent apartments to highest bidders individually. Each apartment is rented to the individual with the highest reservation price. Surprisingly, the same people get apartments as in the competitive market (those willing to pay above p*). The last person pays p* (the competitive equilibrium price). This allocation is Pareto efficient.

  • Pareto Efficiency: A situation where no one can be made better off without making someone else worse off. Both competitive market and discriminating monopolist outcomes are Pareto efficient, as the allocation doesn't leave any possible mutually beneficial transactions on the table. However, the distribution of gains from trade differs significantly between the two.

  • Ordinary Monopolist: If a monopolist can only charge one price for all apartments, the result is not Pareto efficient. The monopolist can increase profits by renting to individuals who aren't already housed. There is an opportunity for a Pareto improvement.

  • Rent Control: Rent control is also non-Pareto efficient by its nature, as it may lead to an arbitrary allocation that leaves possible mutually beneficial trades undone e.g. a lower-paying tenant could potentially be better off and so could a higher-paying tenant without harming anyone else.

Comparative Statics

  • Comparative Statics Analysis: Examines how equilibrium price changes when market aspects change (like supply). It compares two equilibrium states without addressing the process to get to those states.

  • Supply Increase: If the supply of apartments increases (as shown in the diagram), the equilibrium price (p*) falls.

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