Suppose the price of lumber decreases. In the market for new homes, we would expect which of the following to occur?
A) the market clearing price will fall and the equilibrium quantity will rise.
B) the market clearing price will rise and the equilibrium quantity will fall.
C) both the market clearing price and the equilibrium quantity will fall.
D) both the market clearing price and the equilibrium quantity will rise.

Question

Quizplus · Accepted Answer

When the price of lumber decreases, the cost of production for home builders will decrease. As a result, home builders will be able to offer new homes at lower prices. This will cause an increase in the quantity demanded for new homes, which in turn will cause an increase in the equilibrium quantity. However, since the decrease in production costs lowers the price of production of each home, the market clearing price will fall. Therefore, we would expect the market clearing price to fall and the equilibrium quantity to rise. This is consistent with option A.

Suppose the Price of Lumber Decreases