Midterm Fall2008 Solutions

Midterm Fall2008 Solutions - ID NUMBER : NAME : Sabancı...

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Unformatted text preview: ID NUMBER : NAME : Sabancı University ECON 204 / MICROECONOMICS Fall 2008 / Section A MIDTERM EXAM November 15 CLOSED BOOK AND NOTES ANSWER ALL SIX QUESTIONS TOTAL TIME: 120 minutes Q (1) Q (2) Q (3) Q (4) Q (5) Q (6) TOTAL / 40 2 Question (1) (6 points) An economist has done some research on the rental housing market in a certain city and found that (1) the quantity demanded for rental apartments in that city depends negatively on average rents per month, positively on city population, and negatively on the average cost of moving (taşınma masrafları), whereas (2) the quantity supplied of vacant rental apartments in the same city depends positively on average rents per month and negatively on the average interest rates in the last five-year period (because if interest rates are lower in recent years more new residential buildings are constructed and more people buy their second or third apartments and rent them to others). Consider this market as one in which there are a large number of potential tenants (kiracı) who look for rental apartments and a large number of landlords (ev sahibi) who supply vacant apartments with very similar characteristics. (a) Suppose that, this year, costs of moving are expected to increase considerably and, at the same time, the city population will somewhat decrease because of significant increases in the cost of living in recent years. Suppose also that the interest rates have been much higher in the last five years than before. How would you expect the demand for rental apartments will change this year? How would you expect the supply of rental apartments will change this year? How will rents change? Will the number of newly rented apartments be more or less than the number last year? Explain your reasoning using a demand and supply diagram. Make sure to state all different answers if there are more than one answer possible. (a) Now, suppose that, this year, costs of moving are expected not to change due to the stagnant (durgun) transportation market and, at the same time, the city population is expected to increase. Suppose also that the interest rates have been somewhat higher in the last five years than before. Answer the same four questions as in part (a). Answer (each yellow box is worth 0.25 points) (a) Costs of moving increase quantity demanded decreases at any rent per month Population decreases quantity demanded decreases at any rent per month Therefore, quantity demanded definitely decreases at any rent per month, which means that the demand curve shifts to left. I nterest rates increased quantity supplied decreases at any rent per month, which means that the supply curve shifts to left. rent per month D1 D0 S1 S0 Re0 Re1 Qe1 Qe0 Number of apartments 3 Points for the figure (1.5 points in total): Numbeor of apartments along the horizontal axis Rent per month along the vertical axis İnitial demand curve İnitial suppl curve New demand curve New supply curve Since both D and S decrease, equilibrium quantity Qe will also decrease (in the figure, we see that...
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This note was uploaded on 03/16/2012 for the course FENS 101 taught by Professor Selçukerdem during the Fall '12 term at Sabancı University.

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Midterm Fall2008 Solutions - ID NUMBER : NAME : Sabancı...

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