Question

Assume a certain area of UENR Campus has been specifically designed to provide hostel accommodation facilities for students from low-income homes. The students who stay in the area tend to stay there because they cannot afford to live in other hostel facilities on Campus, they prefer to live with students they pursue the same programme with, or there is discrimination against them in other hostel facilities on Campus. Rents paid are a very high percentage of the students' income. Given the above: i. Would the demand for hostel accommodation in this area of the University be relatively inelastic or elastic? Explain why. ii. Would the supply of hostel accommodation in this area of the University be relatively inelastic or elastic? Explain why. Page 1 of 2 iii. On the same set of axes, draw the demand and supply curves showing clearly the equilibrium price and quantity. iv. Now assume the University creates a rent subsidy programme where a student is required to pay 30% of income in a hostel accommodation. Any additional rent is paid by the University - up to a limit. For example, a student with an income of GH¢1000 a month would be required to pay GH¢300 in rent (30%). If the rent is GH¢500, the other GH¢200 would be paid by the University. Analyse the effect of this programme. Who gains and who loses from this programme.

Answer 1

i) Relatively inelastic due to negligible number of substitutes available for students from low income homes.

ii) Supply will be relatively inelastic because because there is a specific area designed for the purpose and so supply cannot expand beyond this area.

iv) the rent subsidy will lead to increase in demand and so demand curve will shift rightward to D1. As a result prices will rise to OP1. However the extension in supply brought about by this price rise is very limited since supply is inelastic. The proportion of price rise I.e.PP1 is much higher as compared to the proportion of quantity rise I.e. QQ1. Thus we can say that this increased demand due to the rent subsidy ultimately means higher profits for the suppliers. The subsidy provider which is the university here, will stand to lose because they will be paying more subsidy per student and not be able to accommodate more students instead