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The general supply function for new housing in Miami is estimated to be Qs = 96 + 2P - 10PL - 4PK where P is the price per square foot of new housing in Miami, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders)
The general supply function for new housing in Miami is estimated to be Qs = 96 + 2P - 10PL - 4PK where P is the price per square foot of new housing in Miami, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month.
Does it make sense for PL and PK to have negative coefficients in the general supply function? Explain why or why not.
Expert Solution
It does make sense for PL and PK to have negative coefficients in the supply function. The price of labor and the price of capital are both costs of production. It makes sense if houses are more expensive to build they will cost more and less will be built.
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