- Welcome to the latest installment in our ongoing exploration of price theory challenges, presented by Professor Bryan Cutsinger. To delve into all of Cutsinger’s problems and their solutions, consider subscribing to his EconLog RSS feed. We invite you to share your suggested solutions in the comments section. Professor Cutsinger will be engaging with readers there over the next couple of weeks, and we will publish his proposed solution shortly afterward. May your graphs inspire clarity, and may the spirit of price theory thrive!
Question: Housing is a remarkably durable commodity, often standing the test of time for decades. Let’s take a closer look at the housing market in Cleveland.
Fast forward to 2026:
- Cleveland boasts 250,000 existing homes, all constructed prior to the year 2000.
- These homes are assumed to never depreciate in value.
- No new homes have been built in Cleveland for the past 26 years.
- The marginal cost to construct a new home in Cleveland stands at $200,000, with the construction sector experiencing constant returns to scale.
(a) Employing a standard supply and demand graph, illustrate Cleveland’s aggregate housing supply curve as it stands in 2026. Be diligent in labeling all pertinent prices and quantities.
(b) Consider a scenario where demand for housing in Cleveland rises. Utilizing your graph, elucidate how this shift impacts the equilibrium price and quantity of housing.
(c) Now envision a situation where demand for housing in Cleveland declines. Again, use your diagram to demonstrate how this alteration influences the equilibrium price and quantity of housing.
(d) Are increases and decreases in housing demand equally impactful on housing prices and quantities in Cleveland? Provide an explanation referencing your supply curve.
