2. The Detroit City housing market consists of three submarkets, high quality, medium quality and low quality.Assume at first that all three submarkets have perfectly inelastic supply curves.

a. Draw supply and demand diagrams for each submarket.

b. The demand curve in the middle submarket now shifts down as the result of the outmigration of middle class households to the suburbs.Keeping supply curves perfectly inelastic, draw new supply and demand diagrams showing the new equilibrium positions in each submarket.Explain the changes in equilibrium illustrated in these new figures.

c. Explain why the assumption of perfect inelasticity in the low-quality market may be unreasonable.Make clear what assumption might be more reasonable.Redraw the initial supply-demand curves for the low quality market under the new assumption.

d. Using the figure from part c, show the effects in the low quality market of the initial downward shift in demand in the middle submarket.Explain what is happening.

e.Does your analysis in part d suggest that the outmigration of middle income households generates any externalities in neighborhoods with low-quality housing?Explain.