Question

e) Suppose that the price of commercial property, a substitute in supply of residential property, rises. What is the possible impact on the market price and quantity of residential property? Explain and illustrate using a diagram.

Answer 1

As the price of commercial real estate, replacing the supply of residential real estate, rises, the market price of residential real estate will increase and the quantity will decrease, as the supply in the residential real estate market changes. In the diagram, the initial level of supply of residential real estate is shown with a bold green line, and after changes - with a thin green line.