Question

Consider the model of housing markets with vacancies. Let R be the rental price (per square foot), K the short-run capacity of the rental market, Q the quantity of rented space and V the amount of vacant space. (a) Let the capacity be 100, the demand for rented space QD = 110 -R and the demand for vacant space be V D = 90 - 4R. What is the housing market equilibrium, i.e. what are the price, the amount of rented space, the amount of vacant and the occupancy rate in the equilibrium? Draw a graph. (b) What is the expected return for a landlord for owning a square foot of rental space (before knowing if it is going to be rented). (c) If the interest rate (and hence required return on housing investment) goes down in the economy, what would be the long-run change in the rental price and the housing capacity? You might find drawing a graph helpful.

Answer 1