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Assume that there has been an increase in the marginal productivity of construction workers building new housing

Economics Dec 15, 2020

Assume that there has been an increase in the marginal productivity of construction workers building new housing. How might this affect the market for new housing?

a. Supply of new housing will fall, leading to an increase in the equilibrium price and a decrease in the quantity of new housing

b. Demand for new housing will fall, leading to a decrease in the equilibrium price and quantity of new housing

c. Demand for new housing will rise, leading to an increase in the equilibrium price and quantity of new housing

d. Supply of new housing will rise, leading to an increase in the equilibrium quantity and a decrease in the price of new housing

Expert Solution

The correct answer to the given question is option d. Supply of new housing will rise, leading to an increase in the equilibrium quantity and a decrease in the price of new housing.

The marginal productivity for a firm is defined as the quantity of output produced by one unit of additional input resource such as labor. An increase in the marginal productivity of construction workers building new housing implies that the overall supply of the new housing in the market will increase. Thus, as the demand of housing does not increase in line with its supply, the prices of the new houses will fall which will lead to increase in the equilibrium quantity such that the quantity demanded is now equal to the increased supply.

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