Chapter 4: Problem 1

Suppose prices for new homes have risen, yet the number of homes sold has also risen. We can conclude that a. the demand for new homes has risen. b. the law of demand has been violated. c. new firms have entered the construction industry. d. construction firms must be facing higher costs.

Short Answer

Expert verified

The correct conclusion is: a. the demand for new homes has risen. An increase in demand could lead to both a higher price and an increase in the quantity of new homes sold, without violating the law of demand, as other factors may be affecting the demand curve.

Step by step solution

Option (a) Analysis: The demand for new homes has risen.

This conclusion could be true, as an increase in demand could lead to both higher prices and a larger quantity of new homes sold. This does not violate the law of demand, as other factors could also be involved in causing a shift in the demand curve, such as changes in income levels, preferences, or expectations.

Option (b) Analysis: The law of demand has been violated.

This conclusion is incorrect, as the law of demand is not violated in this scenario. The law of demand states that there is an inverse relationship between the price and quantity demanded, holding all other factors constant. However, in this case, other factors may not be constant, leading to the observed increase in both price and quantity. It's important to note that the law of demand describes the behavior of consumers in response to the price, but it does not apply when other factors are changing beyond price.

Option (c) Analysis: New firms have entered the construction industry.

This conclusion is unrelated to the given information. An increase in the number of new firms in the construction industry would likely lead to an increase in the supply of new homes rather than affecting the demand for them. If anything, this could result in a decreased price for new homes due to increased competition, but it does not specifically address the increase in price and quantity of homes sold.

Option (d) Analysis: Construction firms must be facing higher costs.

This conclusion is plausible, as higher construction costs could lead to an increase in home prices. However, it does not explain the increase in the number of homes sold. Usually, higher costs would lead to a decrease in demand, but in this scenario, we are given that the quantity of new homes sold has increased. This could perhaps be true in conjunction with another factor affecting demand. Final Conclusion: Based on our analysis, the correct conclusion is: a. the demand for new homes has risen. This conclusion aligns with the given information, as an increase in demand could lead to both a higher price for new homes and an increase in the quantity of new homes sold.

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