To obtain the slope and intercepts of a line (or curve)
To see what causes a movement along a curve
To see what causes a shift of the curve
Importance of the ceteris paribus
assumption
II. Data
The demand for new homes is given by H = a - bR, where H
is the number of new homes bought (in thousands) and R is the
interest rate. (Note: R = 10 means the interest rate is 10%.)
Sketch the curve with H on the vertical axis. Indicate
the two intercepts and the slope.
Select values for the parameters a and b. Both a
and b should be positive. (Why?)
Click on Gimme Homes! to confirm your results.
III. Questions
Select values for the parameters: a = 5000, b =
200.
Sketch the relationship between home sales and the interest rate.
Plot R on the horizontal axis. Obtain the intercepts and
slope. Indicate them on the graph.
Explain the relevance of the ceteris paribus assumption
in this case.
The value of the slope indicates that if the interest rate rises
by 1 percent, ceteris paribus, the number of new homes will
_____________ (insert increase or decrease) by
_________ units.
Suppose the interest rate is 8%. At this interest rate, the
number of new homes bought is __________.
If the interest rate rises from 8% to 12%, ceteris paribus,
the number of new homes bought will decrease from _______ to ________.
Indicate the relevant points on the graph.
The change in R in the preceding question results in a [movement
along the curve / shift of the curve]. Explain.
Suppose consumers' incomes rise. How is this likely to affect the
graph in Question 2?
Increase the value of a by 10%. The new value of a
is _________. Sketch the new curve, indicating its intercepts and slope.
Go back to your initial values for a and b.
Suppose you had sketched the graph with R on the vertical axis.
Obtain the two intercepts and the slope. Compare these with your
findings in Question 2.