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Due to a recession that lowered incomes, the 2002 market prices for last-minute rentals of U.

1.     Due to a recession that lowered incomes, the 2002 market prices for last-minute rentals of U.S. beach-front properties were lower than usual (June Fletcher, “Last-Minute Beach Rentals Offer Summer’s Best Deals,” Wall Street Journal, June 21, 2002, D1). Suppose that the inverse demand function for renting a beachfront property in Ocean City, New Jersey, during the first week of August is p = 1,000 – Q + Y/20, where Y is the median annual income of the people involved in this market, Q is quantity, and p is the rental price. The inverse supply function is p = Q/2 + Y/40. [10 pts. each]

a.    Derive the equilibrium price, p*, and quantity, Q*, in terms of Y.

b.    Show the effect of decreased income on the equilibrium price (p*) and quantity (Q*) of rental homes. Specifically, if the median annual income is lower by $5,000, by how much will p* and Q* change?

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