Answer to Question #231457 in Microeconomics for Ewura-Esi

Question

Assume an area is composed exclusively of apartments and populated by low-income residents. The people live 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.

i. Would the demand for apartments be relatively inelastic or relatively elastic? State why. ii. Would the supply of apartments in this area be relatively inelastic or relatively elastic? State why. iii. Draw the demand and supply curves, showing the first equilibrium price and quantity. iv. Assume the state creates a rent supplement program where the renter is required to pay 30% Of income in rent. Any more rent is paid by the state to a limit. If the rent is C500, the other C200 would be paid by the state. Analyze the results and Show the changes on the graph. Who gains and who loses from this program?

Answer 1

i. Such an area of appartments has a demand relatively inelastic because the residents are already paying a high income proportion as rent and are subjected to discrimination. Since there are higher prices in other areas, they will choose to stay in this area. Therefore, a percentage change in price would result to lower change in demand because people would not prefer to leave the area and there will always be other peolpe ready to fill.

ii. Such an area will have a relatively inelastic supply because the area is composed of low income residents. The supplies know that the residents of this region will not go anywhere else since they can't afford it as they are already paying a huge proportion of their income as rent. Consequently a change in price won't affect the supplied quantity much.

iii. Since no specific values are given, the supply and demand curves shall look as standard supply and demand curves which would be a little towards being vertical with standard equilibrium price and quantity.

iv. low income person would not benefit as they will have to pay the major portion of their income directly to the government even if they live in low rented houses. Therefore the program is beneficial to high income person.