25 Assume there is a simultaneous decrease in the incomes of

25 Assume there is a simultaneous decrease in the incomes of people in the market for new homes and a decrease in the wages paid to carpenters, plumbers, and electricians. All else constant, we can predict, with certainty, that in the market for new homes the equilibrium: quantity of new homes will decrease. quantity of new homes will increase. price of new homes will decrease. price of new homes will increase.

Solution

a. The price of new homes will decrease.

When there is low income and low wages they have less money to spend so there will be a reduction in the quantity demanded of the houses. At the same time the reduction in the wages reduces the cost of production of house making which allows them to supply more. So here is a leftward shift in the demand curve and rightward shift in the supply curve. The ultimate result will be a lower price for the houses.