Question

The Chamber of Commerce in Muggles, OK has contacted you after the downtown core was unexpectedly destroyed by a massive tornado. The Chamber is interested in projecting the market for downtown office space in their city. (a) The Chamber members assure you that the office space market was in equilibrium before the tornado hit. Downtown Muggles had 150,000 square feet of occupied commercial space. The supply was fixed, and therefore perfectly inelastic. Demand was linear and downward-sloping, and the price of office space was $5 per square foot. Use the information in this part to draw a carefully-labeled diagram of the office space market (b) The tornado destroyed one-third of the downtown office space, but the remaining two-thirds was unaffected. Use a new diagram to predict the effect on equilibrium price and quantity of office space in Muggles

Answer 1

The initial supply Is fixed at S₀S₀^' of 150,000 sq. feet was and the demand curve DD' intersected the supply curve at an equilibrium price of $5. The market is in equilibrium. I have assumed that there is no demand for space at a price of $10 per square feet.

After the tornado 1/3rd of space is destroyed and hence 1/3rd of 150,000 sq ft is being removed from the supply and the supply curve shifts to S₁S₁' to a supply of 100,000 sq ft ( 1/3*150,000= 50000) so 50000 sq ft is being reduced from the supply. This raises the equilibrium price of space to a price above $5 per square feet. Here I have predicted a price of $8 per sq. Ft. Thus the equilibrium supply is 100,000 sq. Ft and the predicted equilibrium price is $8. You can make your own assumption regarding the price but it should be more than the price $5.