Question

1. In the housing market prices often are inflexible downward. Show in a supply/demand diagram how this can lead to a surplus. 2. Given the following reservation prices, what price will maximize the quantity sold? Why? Bids to buy $20 $20 $20 $25 $30 $30 $30 $30 $35 $35 Bids to sell $15 $15 $20 $20 $25 $25 $25 $30 $30 $30 3. A friend says he expects to make money in the stock market using what he learned in economics about the effect of currency values on exports. When the dollar falls in value he will invest in corporations that sell exports. Will this work? Why or why not? 4. Use a supply/demand diagram to show what happens to print media sales when more people get their news online. 5. Use a supply/demand diagram to show what happened when the US Postal Service had to pay its workers more and more people used email

Answer 1

Answer:1.

Given that prices are inflexible downward. This means prices will not decrease under any circumstances.

Suppose demand for housing decreases, for example, as a famous college is shifting its campus to another place. This will put downward pressure on the equilibrium price as the supply remains constant. However, since prices are inflexible downward, this will lead to surplus in housing market. This can be shown graphically as under:

Supply Price of housing Quantity of housing

In above graph, P1 is the original equilibrium price where demand equals supply. If demand shifts to D2, the equilibrium price had to decrease to P2 but it could not because of its inflexibility downward. The price remains at P1 where demand is less than supply. Hence it shows surplus.

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