Assume there is a well-defined geographic area of a city. The area is composed e
ID: 1192247 • Letter: A
Question
Assume there is a well-defined geographic area of a city. The area is composed exclusively of apartments and is populated by low-income residents. The people who live in the area tend to stay in that area because (1) they cannot afford to live in other areas of the city, (2) they prefer to live with people of their own ethnic group, or (3) there is discrimination against them in other areas of the city. Rents paid are a very high percent of peoples' incomes.
(1) Would the demand for apartments in this area be relatively inelastic or relatively elastic? State why.
(2) Would the supply of apartments in this area be relatively inelastic or relatively elastic? State why.
(3) Draw the demand and supply curves as you have described them, showing the initial
equilibrium price and quantity. Label carefully.
(4) Now assume the government creates a rent supplement program. Under this program, the renter is required to pay 30% of income in rent. Any additional rent is paid by the government --- up to a limit. For example, a low-income person with an income of $1,000 a month would be required to pay $300 in rent (30%). If the rent is $500, the other $200 would be paid by the government. Analyze the results of this program. Show the changes on the graph and explain what will result. Who gains and who loses from this program?
(5) Instead, now assume that the government decides to provide a building subsidy to people who build apartments in this low-income area. A certain percent of their costs will be paid by the government. Analyze the results of this program. Show the results on the graph and explain what will result.
Explanation / Answer
1) The demand of such an area of apartments shall be relatively inelastic because, since the people are already paying a very high proportion of their incomes as rent and are subject to discrimination and even higher prices in the other area, they shall choose to stay in this area. So, for a percentage change in price, the percentage change in quantity demanded shall be lower because people would not want to leave that area and there will always be other people to fill in.
2) The supply of such an area shall be relatively inelastic, because this area is populated by low-income residents. The suppliers are aware that the people living in these areas will not go anywhere else because they cannot afford it and also that they are already paying a huge proportion of their income as rent. Therefore, a change in price will not affect the quantity supplied much.
3) Since no specific values are given, the demand and supply curves shall look as standard demand and supply curves which would be a little towards being vertical with standard equilibrium price and quantity.