In 2006 the average price of a home rose from 97000 in April

In 2006 the average price of a home rose from $97,000 in April to $106,000 in May. During the same period, home sales fell from 724,000 to 616,000 units. If we assume that mortgage interest rates and all other factors affecting home sales are constant, what do these figures suggest about the elasticity of demand for housing?

Solution

here,

price in april=97,000 , and in may= 1,06,000

home sales , april = 724000, may= 616,000

now, change in price 106000-971000=9*1000

change in home sales 616000-724000= -108*1000

clearly the change in demand for quantity (home sale) is higher than the change in price,so there will be elastic.

the elasticity of the home sale= 108*97/9*724=1.6

since 1.6>1 it is inelastic

thus decrease in price is needed to increase the sell of house.