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) 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?

(4) 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.

(5) From the point of view of improving housing for the poor, decide for yourself which is the

better public policy?