Reference no: EM133078421

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.

Questions:

(1) Would the demand for apartments in this area be relatively inelastic or relatively elastic? State why.

(2) 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 P1,000 a month would be required to pay P300 in rent (30%).If the rent is P500, the other P200 would be paid by the government. Who gains and who loses from this program? Explain.

(3) 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. What is the possible outcome?