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) 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) 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.