True, false or uncertain? Justify your response to the following statements. a) Saying “At $1,000,000, the...
True, false or uncertain? Justify your response to the following statements.
a) Saying “At $1,000,000, the price of buying a typical house in New Zealand is so high that nobody can afford to buy a house” is inconsistent with the conditions of a long run equilibrium of supply and demand.
Homework Answers
The statement is true.
Assuming the price of a typical house is 1MM$ as stated in the statement, it implies that this is the equilibrium price. At this price the supply and demand curve intersect - i.e. there will be some consumers whose reservation price would be higher than the equilibrium price.
Suppose, that the price of 1MM$ is higher than the reservation price of the entire population, then no one will be able to sell the house. As a result, the suppliers will reduce the price until some of the consumers are able to buy, hence reaching an equilibrium price which is lower than 1MM$.
So the statement is inconsistent with the long run equilibrium of demand and supply.
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