Suppose that Tallahassee has 50,000 durable housing units. Let housing supply be perfectly elastic to increases in demand, but perfectly inelastic to decreases from the starting point of 50,000 housing units. Further, suppose that the minimum profitable production cost (MPPC) to construct an additional housing unit is $200,000. Suppose that Tallahassee has 50,000 durable housing units. Let housing supply be perfectly elastic to increases in demand, but perfectly inelastic to decreases from the starting point of 50,000 housing units. Further, suppose that the minimum profitable production cost (MPPC) to construct an additional housing unit is $200,000. Hint: The Glaeser and Gyourko published paper will help you answer this problem.

(a) Draw the supply curve for Tallahassee. Add a linear demand curve that intersects supply at 50,000 units. (b) Suppose the price elasticity of demand for housing at the point where demand intersects supply is ^p_D = 2, what happens to prices if 10,000 units are added to the supply? Calculate the new price of housing. (c) Suppose that Tallahassee institutes a new demolition program that makes housing supply elastic even below the minimum profitable production cost (for this part of the problem only). That is, supply can now decrease below 50,000 when prices fall. Draw a new graph including this supply curve and the original curve. What is the effect of a decrease in housing demand if the new supply curve applies? How does this differ from the effect with the original supply curve? (d) Is the demolition program a good idea? Why or why not?