The general supply function for new housing in New Orleans is estimated to be
Qs = 96 + 2P - 10PL + 4PK
where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month.
5. Does it make sense for PL and PK to have negative coefficients in the general supply function? Explain why or why not.
6. If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is
Qs = ______________________.
7. Graph the supply curve for new housing in the graph below. Label supply S0.
8. Solve mathematically for equilibrium price and quantity.
Show your work: PE = $__________ per square foot.
QE = __________ square feet per month (in 1,000s).
9. Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they?
10. At the equilibrium point in question 8, compute consumer, producer, and social surpluses:
CS = $____________
PS = $____________
SS = $____________
11. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new housing in New Orleans is now:
Qd = _______________________.
Plot this new demand curve in the figure below. Label it D'.
12. Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orleans is now:
Qs = _______________________.
Plot this new supply curve in the figure. Label the new supply curve S'.
13. After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are
PE = $__________ per square foot
QE = __________ square feet per month (in 1,000s)
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The general supply function for new housing in New Orleans is estimated to be
Qs = 96 + 2P - 10PL + 4PK
where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month.
5. Does it make sense for PL and PK to have negative coefficients in the general supply function? Explain why or why not.
6. If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is
Qs = ______________________.
7. Graph the supply curve for new housing in the graph below. Label supply S0.
8. Solve mathematically for equilibrium price and quantity.
Show your work: PE = $__________ per square foot.
QE = __________ square feet per month (in 1,000s).
9. Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they?
10. At the equilibrium point in question 8, compute consumer, producer, and social surpluses:
CS = $____________
PS = $____________
SS = $____________
11. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new housing in New Orleans is now:
Qd = _______________________.
Plot this new demand curve in the figure below. Label it D'.
12. Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orleans is now:
Qs = _______________________.
Plot this new supply curve in the figure. Label the new supply curve S'.
13. After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are
PE = $__________ per square foot
QE = __________ square feet per month (in 1,000s)
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