Consider the market for new, single-family homes in New Orleans. The general demand function for new housing in New Orleans is estimated to be Qd =15 2P + 0.05M + 0.10R where Qd is the monthly quantity demanded, P is the price per square foot, M is average monthly income in New Orleans, and R is the average monthly rent for a three-bedroom apartment in New Orleans. Qd is measured in units of 1,000 square feet per month.

1. New housing in New Orleans is a(n) __________________ (normal, inferior) good. How can you tell from the general demand function?

2. New housing and three-bedroom apartments are _________________ (substitutes, complements) in New Orleans. How can you tell from the general demand function?

3. If average monthly income is $1,500 and the monthly rental rate for three-bedroom apartments is $700, then the demand function for new housing in New Orleans is Qd = _____________________________________.

4. Graph the demand curve for new housing in New Orleans on the axes provided below. Label the demand curve D0. The general supply function for new housing in New Orleans is estimated to be Qs = 96 + 2P 10PL 4PK where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month.

5. Does it make sense for PL and PK to have negative coefficients in the general supply function? Explain why or why not. Chapter 2: Demand, Supply, and Market Equilibrium 58 6. If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is Qs = ______________________.

7. Graph the supply curve for new housing in the graph below. Label supply S0.

8. Solve mathematically for equilibrium price and quantity. Show your work:

PE = $__________ per square foot. QE = __________ square feet per month (in 1,000s).

9. Did your supply and demand curves intersect at PE and QE found in question 8 above? Should they?

10. At the equilibrium point in question 8, compute consumer, producer, and social surpluses: CS = $____________ PS = $____________ SS = $____________

11. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new housing in New Orleans is now: Qd = _______________________. Plot this new demand curve in the figure below. Label it D'.

12. Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orleans is now: Qs = _______________________. Plot this new supply curve in the figure. Label the new supply curve S'. 13. After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are PE = $__________ per square foot QE = __________ square feet per month (in 1000's)