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Unformatted text preview: UNIVERSITY OF ESSEX Autumn Term 2011/12 DEPARTMENT OF ECONOMICS Tim Hatton EC111 Introduction to Economics: Class Exercises 3 Outline Answers 1. The original price faced by buyers and sellers is P 1 . If there is a fixed stock of housing in the short run then the supply curve is completely inelastic (S SR ). A subsidy of V 1 is given to buyers. Notice that here we depict this as an upward shift in the demand curve: buyers demand more housing at any given supply price (P is the price faced by suppliers). The new equilibrium price faced by buyers rises by the full amount of the subsidy, to P 1 +V 1 . Only the sellers benefit from the subsidy. The economist was correct. But in the long run the supply curve for housing is likely to be more elastic (S LR ). Builders, seeing higher incomes from building additional houses, decide to build more houses. In this case we move along the long run supply curve. As compared to the original situation the price to buyers rises, but by less than the full subsidy, and the price...
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This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.
- Spring '12