Sara starts by asking Bill to picture a city with 100,000 apartments, so an occupancy rate of 95% means that 95,000 apartments are occupied and 5,000 are empty. "Now suppose," she goes on, "that 1% of all the apartment dwellers move out each day, How many apartments will become vacant each day?" O 1,200 950 O 860 740 500 "Imagine," Sara continues, "that a few empty apartments have new people move in on the very same day that the old occupants move out. Others take longer. After all, even if lots of people are looking for apartments, it takes a few days for new tenants to come see one that has just come on the market because most people don't search every day. "Let's assume that 19% of all the open apartments get new occupants each day. This means that on average, an apartment is empty for a bit more than 5 days. occupants each day?" So if there are 5,000 empty apartments, then how many apartments get new O 740 O 500 O 860 O 1,200 O 950
apartments that become vacant (1% times 95,000) is equal to the number that get filled (19% times 5,000). So with these rates, 5,000 apartments will always be vacant. The occupancy rate will stay at 95% and the vacancy rate will stay at 5%. "Next, things change. Suppose that a rich genie offers to pay everyone who rents an apartment in this city $500 per month. Surely this would lead to an increase in demand for apartments and eventually to an increase in the price of the apartments. I know this sounds silly," Sara says, "but bear with me. Sometimes when you want to get a sense for what is going on in realistic settings, it helps to start with a thought experiment that analyzes the effects of a more extreme case. "Because no new apartments can be built in this city, supply and demand analysis tells you that when the genie offers a $500 payment to each renter, rents should go up by per month. "Now, to continue this thought experiment, imagine that at first, prices on apartments can't adjust because of rent controls imposed by the local government. Lots of people who don't currently rent in this city will suddenly start looking there because of the $500 payment that they can receive if they become a renter. "In the ensuing frenzy, apartments are snapped up even faster than before. Now suppose that on average, 49% of all vacant apartments get new occupants each day. You'll see in a minute," Sara says as an aside, "why I picked this odd number, 49%. It makes the other numbers come out nicely. "At this rate, the average apartment is vacant for about 2 days. In these conditions, what will the vacancy rate be in this market? To calculate this, continue to assume that 1% of all occupied apartments become vacant every day. I'll give you a hint and tell you that under these new conditions, you should find that 98,000 apartments will have oCcupants at any time, so 1 % of these, or 980 apartments, become vacant each day. "If 49% of the vacant apartments are filled each day, how many vacant apartments must there be for the system to be in equilibrium, with 980 vacant apartments filled each day and 980 that become vacant each day? After you calculate this number, divide it by 100,000 to get the vacancy rate. "So the vacancy rate is
"Finally, what would happen if the government removes the rent controls? You have just calculated the vacancy rate before the government lifts the controls. It is bigger than 1%. This means that every day, there are vacant apartments even in the midst of this frenzy of apartment hunting. But surely when the government removes the price controls, the rents on apartments will shoot up. "And so," says Sara with a smile, "true or false? Prices can be rising in the market for apartments, even with a positive vacancy rate, and even when there are vacant apartments." O True O False