Question

Wenatchee is a town on a large river. On the other side of the river is East Wenatchee (since the river is the county line, these are in two different counties and thus, two different cities.) Wenatchee (which I refuse to call "West Wenatchee") is pretty much hemmed in on all sides by mountains. East Wenatchee, on the other hand, sits on a large plateau surrounded by wheat fields.

Assume that housing in Wenatchee and housing in East Wenatchee are what economists call "perfect substitutes." This means basically that people don't care whether they live in Wenatchee or East Wenatchee. Then imagine that in the nearest big city there is a pandemic followed by a bunch of riots. Part of the town is taken over by Marxists revolutionaries. The city starts dismantling the police and raising taxes because they have no money. (Just try to imagine it!) and this causes a lot of people to decide it would be nice to live in a smaller town on the other side of the mountains.

Which will grow more, Wenatchee or East Wenatchee? Why? Your answer should include econ words like "supply," "demand," "quantity supplied," "quantity demanded," and a certain important word from chapter 5. It should also probably include a graph or two.

Answer 1

I found the story interesting, so I made a sketch (my poor sketching ability must be excused) :)

1. There is sudden rise in demand for alternative housing location. This demand is created by the residents of nearest big city
2. Supply of housing is available in ample from Wenatchee and East Wenatchee both
3. Housing in Wenatchee and East Wenatchee are perfect substitute for each other. However this neutrality of choice exists only for the existing residents of two smaller towns.
4. Housing in Wenatchee and East Wenatchee will not be perfect substitutes for the migrant residents coming from the nearest big city. Why? Because there is river between the two options.
5. Migrants from Nearest big city, will of course prefer living in Wenatchee for two reasons (i) it is nearer from their previous habitat; (ii) They have to cross just the mountains to travel in between.
6. Migrants from Nearest big city, will not prefer living in East Wenatchee for two reasons (i) it is farther from their previous habitat; (ii) They have to cross mountains, then Wenatchee and then the river too, to travel from their existing habitat to their new potential address.
7. Housing in Wenatchee will be more in demand from the new migrants from nearest big city.
8. Housing in East Wenatchee will be less in demand from the new migrants from nearest big city.
9. Housing in Wenatchee will run a premium pricing as compared to that in East Wenatchee. It is so because, the quantity supplied of housing in Wenatchee is limited (a scarce resource as per economics).
10. Housing in East Wenatchee will run a discounted pricing as compared to that in Wenatchee. It is so because, the quantity supplied of housing in East Wenatchee is more than the quantity demanded.