The supply of homes is = 4 − 15, where w is the average wage of construction workers in dollars per hour and P is in hundreds of thousands of dollars. Demand is = 100 −

2 + 10, where m is median family income in thousands of dollars.

a) Solve for the equilibrium price and quantity if m=40 and w=20.

b) Draw the supply and demand curves and label the equilibrium price and quantity.

Now, suppose the supply of housing in the short run is the maximum of = 4 − 15 and

what is already in place (given by your answer to a), so supply is “kinked” at the quantity already

in place. Further, suppose income decreases from 40 to 30 due to a recession.

c) Draw the kinked short run supply curve and the new demand curve at the lower income level

and label the equilibrium price and quantity with reduced demand. Solve for the equilibrium

price.

d) If demand stays depressed, what would the new long run equilibrium price and quantity be? In

the long run, = 4 − 15, since given enough time even the quantity of housing can fall.

Describe how the market would get from the short run situation of part c to this point.

e) Describe the impact of the recession is on the market for NEW single-family homes and

construction employment based on your work in c and d. Similarly, describe the impact on the

construction industry if demand recovers. Macroeconomists refer to these effects of the

construction industry as accelerator effects. Why do you think that is, based on your work?