Answer to Question #137369 in Microeconomics for ADITYA ANTHWAL

Question

Every year, the housing market in Monotone, Arizona, has the same experience: The demand curve for housing shifts rightward by 500 homes, 500 new homes are built, and the price of the average home doesn't change. Using supply and demand diagrams, illustrate how each of the following new events, ceteris paribus, would affect the price of homes in Monotone during the current year, and state whether the price rises or falls.
c. The Monotone city council passes a new zoning law that prevents any new home construction in Monotone during the year.
d. Because of the new zoning law, and the resulting change in home prices, people begin to think that homes in Monotone are a better investment than they had thought before.
e. 500 new homes are built in Monotone during the year, but that same year, an earthquake destroys 2,000 preexisting homes. As a result of the earthquake, 3,000 homeowners decide they no longer want to live or own homes in Monotone.

Answer 1

c) Following figure shows supply and demand curve for housing market in Monotone,Arizona-w

Initially, the market for housing in Monotone, Arizona is in equilibrium at point A.

Equilibrium price in market is P per home and Q number of homes is available for ownership.

Now, like every other year demand for homes increase by 500 homes. This is shown in the above figure (1) by the rightward shift of demand curve from D to D₁

However, usually increase in supply of homes by 500 homes has not happened in the current year as new zoning law has prevented any new home construction and thus stock of homes has remained same as previous year.

New equilibrium is attained at point Where new demand curve D1 is intersecting the supply curve S

Equilibrium price of home has risen from P₁ to P₂ whereas stock has remained same as it was in previous year.

Thus ,price of home rise as new zoning laws that prevents construction of any new homes comes into existence.

d. Figure 2 below shows the supply demand diagram for housing in Monotone,Arizona-

Explanation on diagram;

Initially,the market for housing in Monotone, Arizona is in equilibrium at point A.

Equilibrium price in Market is P per home and Q number of homes is available for ownership.

With new home construction being prevented by new zoning laws,people has started expecting home purchase as a better investment option and thus demand for homes in housing market in Monotone has increased by more than 500 homes(usual increase in demand each year)

This is show in above figure 2 in diagram sector by the rightward shift of demand from D to D1.

However ,usual increase in supply of homes by 500 homes has not happened in the current year as new zoning law has prevented any new home construction and thus stock of homes has remained same as it was in previous year.

New equilibrium is attained at a point B.where new demand curve D1 is intersecting the supply curve S.

Equilibrium price of home has risen from P1 to P2 whereas stock of home has remained same as it was previous year.

Thus there is rise in home prices as new zoning laws comes into existence and people increasing their demand for homes as they consider homes in Monotone a better investment option.

e. The figure showing the supply-and-demand diagram for the below respond is in on figure 3.

explanation:

Initially,the market for housing in Monotone, Arizona is in equilibrium at point A.

Equilibrium price in Market is P per home and Q number of homes is available for ownership.

it has been stated that every year demand for homes in Monotone increases by 500 homes. However ,this year due to earthquake 3000 homeowners had decided that they do not want to live in or own homes in Monotone. so,there will be net decrease for homes in Monotone by 2500 homes.

Thus,demand for homes in Monotone will decrease by 2500 homes.

This is shown in figure 3 above in diagram by the leftward shift of demand curve from D to D1.

on the other hand ,every year supply of homes in Monotone increases by 500 homes. However, this year 2000 homes have been destroyed by earthquake. so, there will be net decrease in supply of homes in Monotone by 1500 homes.

Thus, supply of homes in Monotone will decrease by 1500 homes.

This is shown in the below diagram section by the leftward shift of supply curve from S to S1.

New equilibrium is attained at point B, where new demand curve D1 is intersecting the new supply curve S1

Equilibrium price of home has fallen from P1 to P2.

Stock of home has also decreased from Q to Q-1500

Thus ,the price of home has fallen in Monotone due to earthquake.