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.

Question

1-Draw the demand and supply curves as you have described them, showing the initial

equilibrium price and quantity. Label carefully.

(2) 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.  

Answer 1

1) The below graph shows the demand and supply in the low-income area housing market. Initially, the housing market is at an equilibrium where the demand for the houses is equal to the supply of the houses. The demand curve D meets the supply curve S at the point "a" and sets the price P and quantity Q at the equilibrium price.

2) After the government announces subsidies for the houses built in the area. The input cost of the houses will be reduced. This will shift the supply curve S to S1 at a lower price and a higher quantity demand. As the prices are low people can build more houses and their demand will increase. The new equilibrium price will be P' and new quantity will be Q'. The equilibrium point after subsidy will be "b". at a lower cost and greater supply.