Question

Question: Remember when hurricane “Katrina” hit Louisiana? As a result of this, many people relocated into Houston and surrounding areas. Keeping this even in mind, what should have happened to the market equilibrium for rent? (i.e. the price of housing). Assume “rent” falls into a perfectly competitive market.

	Price of rent decreases and quantity of housing increases
	Price of rent decreases and quantity of housing decreases
	Price of rent increases and quantity of housing decreases
	Consumers purchase greater quantities of Apple Pie.
	Price of rent increases and quantity of housing increases

Answer 1

The figure represents housing market in Houston. D0 and S0 are the initial demand and supply curves for rental houses. Since equilibrium is where demand and supply curves intersect, P0 is the initial rent and Q0 is the initial equilibrium quantity.

As a consequence of hurricane “Katrina” hitting Louisiana, many people relocated into Houston and surrounding areas. Thus demand for rental houses in Houston increased, that is, demand curve shifted rightwards from D0 to D1. The new equilibrium is where D1 and S0 intersect. P1 is the new equilibrium rent and Q1 is the new equilibrium quantity. Clearly, P1 > P0 and Q1 > Q0.

Thus the correct answer is: (d) Price of rent increases and quantity of housing increases.