Consider the housing market. (1) Suppose that the current equilibrium price is $200,000 per home. Homes and
furniture are complementary goods and the price of furniture decreased. Is this a change in supply or demand? Describe what would be true in the market if, after this development, the price remained at $200,000. Would this be an equilibrium price? Why or why not? What would eventually happen in the market for homes? What would happen to the equilibrium price and quantity for homes? Which quantity is affected and why? What should happen in the market for furniture (no graph needed here only and explanation)? (2) Now assume that the price of building materials rise, what should happen to price and quantity of homes? Which law is in action (law of demand or law of supply)? (3) Combine both events (1 and 2 changes) and explain what happens to equilibrium price and quantity. In your explanation, analyze each events separate and then combine them. Make sure you label your graphs correctly. Label each event. Hint: you should have three graphs.
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