Question

You are an executive for a large home building company. You know that homes are a normal good, as incomes increase, the number of homes bought increases. And incomes are increasing due to tax cuts and a growing economy. Builders use plywood in the construction of new homes and the price of plywood has soared due to environmental regulations on logging. Using demand and supply analysis, what do you expect to happen to the equilibrium price and quantity of homes.

Answer 1

Due to the increase in the income levels as a result of the tax cutting and the growing economy the demand for the houses will increase because of the increase in the purchasing power of the people.

Secondly due to the rise in the price of the plywood which is used in the making of the houses, the supply being directly proportional to the price as per the law of supply, The supply of the houses will also increase.

Hence as a result of the increase in the demand and the supply of the houses, BOTH THE EQUILIBRIUM PRICE AND THE EQUILIBRIUM QUANTITY WILL INCREASE.