S.
Klepper, Economics
73-100, Fall 2011
The
price of new homes in the long run is determined by the long-run average cost
of producing new homes. Variations in
the demand for new homes can contribute to short-run but not long-run changes
in price. Consequently, the only thing
that could cause new home prices to rise relative to the rate of inflation in
the long run is an increase in the average cost of producing new homes above
the rate of inflation. The increase in
material prices and the series of regulations both would cause average cost to
rise by more than the rate of inflation and so could account for the long-term
rise in the price of new homes. The
other factors (in questions 1, 3, and 5) all bear on the demand for new homes
and could not cause the long-term price increase.
Based
on this description, the answers to the individual questions are:
_____1. False
_____2. True
_____3. False
_____4. True
_____5. False