Question

Assume household income has fallen dramatically in Country X and the cost of construction materials for building new houses has increased. How will these changes affect the equilibrium price and equilibrium quantity for new houses?

A) The equilibrium price will increase, and the equilibrium quantity will decrease.
B) The equilibrium price will decrease, and the equilibrium quantity will decrease.
C)The equilibrium price will decrease, and the equilibrium quantity will increase.
D) The equilibrium price will decrease, and the equilibrium quantity will be indeterminate.
E) The equilibrium price will be indeterminate, and the equilibrium quantity will decrease.

Answer 1

Answer:

A) The equilibrium price will increase, and the equilibrium quantity will decrease.

Explanation:

Since the cost of building materials have increased, equilibrium price of new houses will increase, however, equilibrium quantity of new houses will reduce. According to the law of supply and demand, unless a product is inelastic, increase in price results in decrease in demand. Thus with the increase in the cost of new houses, will bring about a decrease in the quantity of new houses.