Economics: The Basics 1st Edition by Mike Mandel

Exercise 7

The price of homes affects the number of new homes built-the higher the price rises, the more new homes are built. Economic literature suggests that a reasonable value for the price elasticity of supply for home construction is 3, so a 1 percent price increase generates a 3 percent increase in new home construction.
a) Suppose the average price of homes in a town is $300,000, and 100 new homes are constructed in the town each year. Now suppose the average price of homes goes up to $330,000. What is the new rate of home construction per year?
b) Instead of rising, suppose the average price of homes in the town falls from $300,000 to $270,000. What is the new rate of home construction per year?