Question
In: Economics
Suppose the home construction industry is perfectly competitive. When the industry expands or contracts in the...
Suppose the home construction industry is perfectly competitive. When the industry expands or contracts in the long run, the minimum possible average cost of home building remains fixed at $50 per square foot. Suppose the industry is currently in equilibrium. If the demand for housing decreases,
a. the price of home construction will fall both in the short run and the long run.
b. the price of home construction won't fall in the short run, but will fall in the long run.
c. the price of home construction will go down in the short run, but return to an equilibrium price of $50 per square foot in the long run.
d. the price of home construction won't fall either in the short run or the long run.
Solutions
Expert Solution
The correct answer is c.
(a) In a perfectly competitive market, with the decrease in the demand, there is fall in the price only in the short run. Prices will not be affected in both short and long run.
(b) Since home construction is a perfectly competitive market, with the decrease in the demand, the price of the houses will fall in the short run.
(c) In the perfectly competitive market there will be a fall in price of the houses with the decrease in demand but only for short run. There is zero economic profits in the long run in perfectly competitive market. So price will come back to equilibrium in the long run.
(d) With the decrease in demand of houses in perfectly competitive market, the price of the houses will fall in the short run.
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