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ECO401 ASSIGNMENT SOLUTION 1
SPRING 2021
Provided by VU Answer
Marks: 10
Due Date: May 11, 2021
THE CASE:
Pakistan is the fifth most popular country in the World, with 220 Million citizens. Out of total population, 36.38% lived in urban areas where as 63.62% resides in rural areas. There is a huge demand for houses due to a 2.4% annual population growth rate as per census 2017. Further, Pakistan’s construction industry is suffering from a severe storage of housing facilities, particularly for low and middle-income groups. Suppose the quantity demanded and quantity supplied functions for houses are given below:
Qd=25000 – 2P
Qs= 10,000+1P
Where “P” is the price in rupees of a housing unit, “Qd” is quantity demanded for housing units. “Qs” is quantity supplied for housing units.
Calculate the market equilibrium level of price and quantity of a housing unit.
Requirement No. 1:
Calculate the market equilibrium level of price and quantity for a housing unit.
Solution:
Qd = Qs
25,000 – 2P = 10,000 – 1P
25,000 – 10,000 = 2P + 1P
15,000 = 3P
15,000 / 3 = 3P / 3
5000 = P
Qd = 25000 – 2P
Qd = 25000 – 2 (5000)
Qd = 25000 – 10,000
Qd = 15000
Qs = 10,000 + 1P
We know that P = 5000
Qs = 10,000 + 1(5000)
Qs = 10,000 + 5000
Qs = 15000
Requirement No. 2:
Calculate the Price elasticity of demand using point elasticity method when the construction industry in the equilibrium and interpret the result.
Now consider if government decides to cater this increasing demand of houses and wishes to intervene in rental market to provide renters with affordable houses.
Solution:
Formula of Point Elasticity:
∆Q∆P ×PQ
Putting Values in Formula:
-2* (5000 / 15,000)
-2 * 0.3333
-0.6666
Requirement No. 3:
What kind of price rationing strategy should be implemented by Government to provide renters with houses at an affordable prices? Also, mention the impact of this strategy on equilibrium quantity demanded and equilibrium quantity supplied of houses?
Solution:
For the given case we have followed the “Price Floor Strategy” Because this is a supporting strategy.
Increase Supply
Decrease Price
Increase Demand
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