Question

For the next several questions, consider the market for lumber in the United States. What is the likely impact on the price & quantity for lumber from the following changes, other factors held constant?

The price of stucco, a substitute for lumber, increases dramatically.

1. What is the change (if any) on the equilibrium price for lumber?

Select one:

a. no change

b. increase

c. decrease

2. What is the change (if any) on the equilibrium quantity for lumber?

Select one:

a. no change

b. increase

c. decrease

Answer 1

Given, the price of stucco, a substitute for lumber, increases dramatically.

1. What is the change (if any) on the equilibrium price for lumber?

Answer: b) Increase

2. What is the change (if any) on the equilibrium quantity for lumber?

Answer: b) Increase

This is because when the price of the substitute (stucco) increases dramatically, the demand for the substitute decreases. As lumber becomes relatively cheaper, consumers start demanding more of lumber (ceteris paribus) which leads to a rightward shift in the demand curve of lumber, resulting in an increase in both equilibrium price and quantity of lumber.