Question

For the next several questions, consider the market for lumber in the United States. What is the likely impact on the price & quantity for lumber from the following changes, other factors held constant?

The interest rate falls, leading a boom in new housing starts.

1. What is the change (if any) on the equilibrium price for lumber?

Select one:

a. increase

b. no change

c. decrease

2. What is the change (if any) on the equilibrium quantity for lumber?

Select one:

a. no change

b. increase

c. decrease

A growth in tree fungus spreads through the United States, killing many trees.

3. What is the change (if any) on the equilibrium price for lumber?

Select one:

a. increase

b. decrease

c. no change

4. What is the change (if any) on the equilibrium quantity for lumber?

Select one:

a. decrease

b. increase

c. no change

Answer 1

Q1. a. increase.

​​​​​​Housing boom will increase the demand for lumber as there are more houses being constructed. This will shift the demand curve of lumber towards right. It means that more quantity of lumber is demanded at each every price. This will increase both equilibrium price and quantity of lumber.

Q2. b. increase.

​​​​​​We have seen in the part a that a housing boom increases the demand for lumber that increases both equilibrium price and quantity of lumber.

Q3. a. increase

​​​​​​The fungus will cause production of lumber to fall. This decreases the supply of lumber that shifts the supply curve of lumber towards the left. This means that less quantity is supplied at every price level or a higher price is charged at the every quantity than before. This will decrease the equilibrium quantity and increase the equilibrium price.

Q4. a. decrease.

From part c, we know that the equilibrium quantity decreases.