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Hal Varian - Intermediate Microeconomics Chapter 1 solutions
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Solutions to Q1-8 Intermediate Microeconomics Hal Varian
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CHAPTER 1: THE MARKET1. The demand curve would be a horizontal line at p=500 from q=1 until q=25 then
there would be a discontinuity and a point on the curve at (q, p) = (26, 200).
2. The equilibrium price with 24 or 25 apartments would be 500. With 26 apartments
the equilibrium price would be 200.
3. The market demand curve slopes downwards as it sums the total demand by the
market at a particular price. If the price is high, only a small number of individuals
with reservation prices greater or equal to the price will demand the good. If the
price is low, more people’s reservation prices will be within the threshold set by the
price so a greater quantity of the good will be demanded.
4. By assumption, inner-ring apartment renters have a higher reservation price than
outer-ring people. If all the condominium purchasers were outer-ring people, the
inner-ring people would all demand the now-smaller supply of inner-ring
apartments. The price of inner-ring apartments would therefore increase.
5. The supply of apartments would fall drastically with the construction of new
condominiums. Hence, the price of apartments would increase.
6. A tax would increase the price of the apartment. However, this is a deadweight loss
so it does not incentivise producers to supply more apartments. The tax burden
bearer depends on the elasticity of the apartments. If they are inelastic, then
demand will not be affected by the change in price and the consumer will bear the
tax burden, making the apartments more expensive and, hence, lessening the
demand for apartments. The producer will need to bear the tax burden if they are
elastic. This increases the costs to the producer and causes a fall in the quantity
produced. In both scenarios, the quantity supplied is reduced.
7. A monopolist sets a price that is higher than the equilibrium price. At equilibrium,
the price would be such that the demand equals the supply. The price would
therefore be 20. However, a monopolist is likely to set a price greater than this
equilibrium price to sell fewer apartments but make more profit.
8. Suppose an individual purchased an inner-ring apartment at their reservation price.
If the price increased, the individual would sublet it at a higher price and make a
profit. Each person in the recursive subletting system could do the same thing and
make a profit. The inner-circle apartments would be allocated to those with the
highest reservation prices. However, these individuals would be worse off since the
price of the apartments would be much higher due to the profit each individual
desires to make on the letting process. The outcome would not be Pareto efficient,
since individuals with lower reservation prices would end up owning the inner-circle
apartments and exploiting those with higher reservation prices.
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