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ECO401 Economics Assignment 01 spring 2021 Solution / Discussion Due Date: 11-05-2021

THE CASE:

 

Pakistan is the 5th most populous country in the world, with 220 million citizens. Out of total population, 36.38% lives in urban areas whereas 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 shortage 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 = 10000 + 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.

 

Requirement No.1: Calculate the market equilibrium level of price and quantity for a housing unit.

 

(Marks:3)

 

Requirement No.2:    Calculate price elasticity of demand using point elasticity method when

 

the construction industry is in equilibrium and interpret the result.

 

(Marks:4)

 

 

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.

 

 

Requirement No.3: What kind of price rationing strategy should be implemented by government to provide renters with houses at affordable price? Also mention the impact of this strategy on equilibrium quantity demanded and equilibrium quantity supplied of houses?

(Marks:3)

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ECO401

Assignment No 1 Solution

Spring 2021 by

MC180201254

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.

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

Qs =  10,000 + 1(5000)

Qs = 10,000 + 5000

Qs = 15000

Requirement No 2:

Calculate price elasticity of demand  using point elasticity method when the construction industry is in equilibrium and interpret the results.

Solution: Formula of Point Elasticity:

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 affordable price? 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 supporting strategy.

Increase Supply

Decrease Price

Increase Demand

SEMESTER SPRING 2021 ECONOMICS (ECO401) ASSIGNMENT# 1

Marks: 10 Due date:

May 11, 2021

Student ID

 

THE CASE:

Pakistan is the 5th most populous country in the world, with 220 million citizens. Out of total population, 36.38% lives in urban areas whereas 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 shortage 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 = 10000 + 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.

Requirement No.1: Calculate the market equilibrium level of price and quantity for a housing unit. (Marks:3)

 

Solution:

            We know that at equilibrium

            Quantity of supplied = Quantity of demanded

            Qs                    = Qd

            10000 + 1P      = 25000 – 2P

            1P + 2P            = 25000 – 10000

            3P                    = 15000

            P                      = 15000 / 3

            P                      = Rs. 5000

 

            Putting value “P” in any one functions

            Qs                    = 10000 + 1 (5000)

            Qs                    = 10000 + 5000

            Qs                    = 15000

            Qd                   = 25000 – 2 (5000)

            Qd                   = 25000 – 10000

            Qd                   = 15000

 

Answer

            P = Rs. 5000

            Qs = Qd = Q = 15000

 

 

Requirement No.2: Calculate price elasticity of demand using point elasticity method when the construction industry is in equilibrium and interpret the result. (Marks:4)

Solution:

Formula: Point elasticity =

Qd       = 25000 – 2P

            = 0 – 2(1)

            = - 2

Point elasticity            = - 2 x

Point elasticity = -2 / 3

Point elasticity = - 0.6666

 

 

           

 

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.

Requirement No.3: What kind of price rationing strategy should be implemented by government to provide renters with houses at affordable price? Also mention the impact of this strategy on equilibrium quantity demanded and equilibrium quantity supplied of houses? (Marks:3)

Answer

Price Floor Strategy because

 

Impact of Strategy on Equilibrium

Supply Increase

Price Decrease

Quantity Increase

 

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