Question 3: Consider the market for Apartments for Rent in Minneapolis. For each

Question

Question 3: Consider the market for Apartments for Rent in Minneapolis. For each of the following situations, state: Is the effect a Supply or Demand Shifter. Of the 4 possible demand shifters, and 4 possible supply shifters, specifically say which shifter. (If more than one effect, do this for each effect.) Is the effect a positive shifter (does demand or supply increase) or a negative shifter (does demand or supply decrease). What will be the effect on equilibrium price and quantity. 1. 2. 3. Although it may help you to draw a picture, it is not required for full credit. State any assumptions that you need to make. (a) A city report says that Minneapolis is very dangerous to live in, close suburbs are much safer AND a number of new apartment buildings have been built. (b) Average income in Minneapolis increases. State any assumptions. (c) The average price for houses in Minneapolis increases AND a large storm destroys many apartment buildings in Minneapolis. State any assumptions. Answer:

Explanation / Answer

(a) The city report about Minneapolis being dangerous place to live in is a Demand shifter. It is a negative demand shifter about consumer tastes and preferences to be shifted away from apartment demand in Minneapolis. It will lead to a fall in demand, shifting demand curve leftward and reducing both rent and quantity of apartments. At the same time, new apartment buildings being built is a Positive supply shifter, which increases the supply of apartments available for rent. It will lead to a rise in supply, shifting supply curve rightward, reducing rent but increasing quantity of apartments for rent. The net effect is a definite decrease in rent, but quantity may rise, fall or remain unchanged based on whether the rightward shift in supply curve is higher than, lower than or equal to the leftward shift in demand curve.

(b) Increase in average income is a Positive Demand shifter. The key assumption is that rental apartments are normal good whose demand rises with increase in consumer income. As a result the demand curve shifts rightward, increasing both rent and quantity of rental apartments ceteris paribus.

(c) Higher average price of houses is a positive demand shifter for rental apartments, assuming houses and rental apartments are perfect or near-perfect substitutes in consumption. This will increase the demand for rental apartments, and the demand curve shifts rightward, increasing both rent and quantity of rental apartments. At the same time, destruction of apartments is a negative supply shifter which decreases the stock (availability) of rental apartments. This shifts the supply curve leftward, increasing rent and decreasing quantity. The net effect is a definite increase in rent. But quantity may rise, fall or remain unchanged based on whether the rightward shift in demand curve is higher than, lower than or equal to the leftward shift in supply curve.

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