3. A local realtor estimated the long-term income elasticity of demand for renta

Question

3. A local realtor estimated the long-term income elasticity of demand for rental properties to be 0.9 and the long-run income elasticity for owner-occupied housing to be 1.10. Recent estimates indicate that income is forecast to rise at 5% per year over the next 2 years. What is the expected effect on the quantity demanded for rental housing and owner-occupied housing (assuming rental rates and the price of housing remain constant). If housing prices rise during the same period, how would the quantity demanded of each type of housing be affected?

Explanation / Answer

income elasticity of demand = Change in demand/Change in income income elasticity of demand for rental properties = 0.9 = change in the quantity demanded for rental housing /5% change in the quantity demanded for rental housing = 4.5% change in the quantity demanded for owner-occupied = 1.10. *5% = 5.50%

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