JPJC H2 Prelim 2024 P2 Solutions

2024JPJCJC2PrelimH2P2SuggestedAnswer Question1:Rental pricesacrosstheUShavesoaredoverthepast year. Asthepandemicwearson,incomesstart torise, andmorepeoplearelookingfortheirownspace. At thesametime,pandemic-relatedsupplychaindisruptionsthatledtoshortagesofbothworkersandmaterialshaveresultedinwidespreadconstructiondelays.Asrentalpricessoaracrossthecountry,morelocalgovernmentsareturningtorentcontrolmeasurestohelpcontainhousingcosts. (a)ExplainhowtheabovementionedeventscausedrentalpricestosoarintheUS.[10](b)DiscusswhetherrentcontrolisthebestpolicytoaddresstherentalcrisisintheUS.[15] SuggestedAnswer (a) TheequilibriumrentalpriceintheUSisdeterminedbythedemandandsupplyofhousinginthemarket. Ariseinincome, morepeoplelookingfortheirownspaceandshortagesof bothworkersandmaterialshavecausedrentalpricestosoarintheUS. TheriseindemandandfallinsupplyofhousinghavecausedrentalpricetoincreaseintheUS.Asthepandemicwearsoff,incomesstarttorisewitheconomiesreopeningandjobcreation.ThisincreasesthepurchasingpoweranddemandfornormalgoodsthatincludehousingintheUS.Inaddition,thereisachangeintasteandpreferenceasmorepeoplearelookingfortheirownspaceasapersonallifestylepreference,increasingdemandforhousing.HencedemandcurveshiftsrightwardsfromDD0toDD1, causingashortageat original P0andariseinequilibriumrentalprice. Inaddition,pandemic-relatedsupplychaindisruptionsthatledtoshortagesofbothworkersandmaterialshaveresultedinwidespreadconstructiondelays.Theseresultinariseinlabourandmaterials cost, increasing the cost of production of housing. Hence profits fall andprofit-maximisingproducershavelessincentivetoproduce,causingafallinsupplyofhousing.HencesupplycurveshiftsleftwardsfromSS0toSS1,causingashortageatoriginalP0andariseinequilibriumrentalprice. Boththecombinedeffectofariseindemandandfallinsupplycausedamutuallyreinforcingeffectontheriseinequilibriumrentalprice,causingrentalpricestosoarintheUS. 1

ThesoarinrentalpricesintheUScanalsobeattributedbytheconceptsofpriceelasticityofdemand(PED)andpriceelasticityofsupply(PES). Demandforhousingispriceinelastic(PED<1)asitisabroadlydefinedgoodthatlacksclosesubstitutes. Demandcurveisrelativelysteeperandtheriseinpricewill causealessthanproportionatefallinquantitydemanded.Hencealargerriseinequilibriumrentalpriceisneededtocleartheshortagegiventhefallinsupplyofhousing. Supply of housing is price inelastic (PES<1) asit hasalongconstructionperiodthat isfurthermoredelayedduetosupplychaindisruptions.Supplycurveisrelativelysteepandtheriseinpricewillcausealessthanproportionateriseinquantitysupplied.Hencealargerriseinequilibriumrentalpriceisneededtocleartheshortagegiventheriseindemandforhousing. Hence,giventhatbothdemandandsupplyofhousingispriceinelastic,therewillbealargeriseinequilibriumrentalpricetocleartheshortage,causingrentalpricestosoarintheUS. Inconclusion,theriseindemandandfallinsupply,togetherwithpriceinelasticityofdemandandsupplyhavecausedrentalpricestosoarintheUS. SuggestedAnswer (b) Ariseinincome,morepeoplelookingfortheirownspaceandshortagesofbot