Log Cabin

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Frequently Asked Questions...

What would happen to the market for log cabins if consumer income increased by 19% in Montana?

How would the supply and demand graph look like? I'm a little unsure if demand would decrease or increase since I don't know if people would want to upgrade from log cabins because they have more money? Or are log cabins really expensive in Montana? Thanks for the help!

Best Answer...


You don't need to know about elasticity to answer this question. The question involves determinants of supply and demand, and how they affect the curves.

Changes in consumer income is a non-price determinant of demand. That means that it will shift the demand curve. Assuming that log cabins in Montana are a normal good, you would have an upward-sloping supply curve, a downward-sloping demand curve, and the increase in consumer income would be represented by the demand curve shifting to the right. This will result in an increase in equilibrium quantity and equilibrium price for log cabins.

The only way this wouldn't be true if log cabins were considered to be an inferior good instead of a normal good. That would imply that, before the increase in income, many people were living in log cabins only because they couldn't afford other kinds of housing, and the increase in income allowed more people to afford alternative housing. I don't believe that this is true. I know that construction of a modern log cabin is not that much cheaper than construction of some other forms of housing. If log cabins were an inferior good, the demand curve would be upward-sloping, and the increase in income would shift it to the left, decreasing the equilibrium price and quantity.

It is possible that they are expecting you to give both possibilities in your answer, rather than assuming either normal or inferior good. That is how I would answer the question.