When air rises, its pressure falls and causes it to cool. The rate at which temperature of air falls as altitude increases is called the lapse rate.
The dew point is a measure of how much water vapour (invisible moisture) is in the air. When the actual temperature is equal to the due point, the air can hold no more water vapour and it is said to be 'saturated.'
Air whose temperature is above the dew point cools at 3 deg C for every 1000 feet increase in altitude -- the DALR dry adiabatic lapse rate. When air continues to cool to temperatures below the dew point, it cannot hold so much water vapour. So some of the water vapour condenses into tiny visible droplets and you have cloud.
The process of condensation gives out heat, so when saturated air rises it cools (like unsaturated air), and excess water vapour condenses out as cloud, but the effect of the heat given out is to reduce the rate at which the temperature falls. Saturated air cools at 1.5 deg C per 1000 feet increase in altitude -- the SALR saturated adiabatic lapse rate.
Coming to the question:
The temperature on the ground is 20.5 deg C. Air from the ground rises and (the temperature being above the dew point) cools at 3 deg C per thousand feet. The air temperature reaches the dew point 1500 feet; water condenses out and cloud forms.
So the calulation is:
20.5 - 16 = 4.5
4.5/3 = 1.5 thousand feet
ie 1500 feet.
The actual variation in temperature with altitude is not exactly as described above due to variations in the atmosphere and to other warming and cooling effects (other than expansion of the air as altitude increases), hence the actual lapse rate between two levels will be different. To complicate things further, the lapse rate in the standard atmosphere of about 2 deg C per thousand feet is also rarely found in the real atmosphere.
Pretty much everybody has trouble with this at first, so don't be disheartened.
AA.