Question

In recent years, Web sites such as zillow.com have made it easier for home sellers to figure out what price to charge for their home-one of the tasks that real estate agents perform for sellers. And a variety of other Web sites enable home buyers and sellers to find each other without using an agent at all. Suppose these new technologies catch on with half of the home sellers in an area, while the other half continues to prefer selling with an agent. Assume that home prices and the commission rate stay unchanged. Before accounting for entry or exit of agents: a. Describe what would happen to a typical agent's \(A T C\) and \(M C\) curves. b. What would happen to the number of homes sold by a typical agent? c. What would happen to the economic profit of a typical agent? Now take account of entry or exit of agents in response to the new technologies available for home selling. Compared to the results you found above, how will entry or exit affect: d. \(A\) typical agent's \(A T C\) and \(M C\) curves? e. The economic profit of the typical agent? f. The number of homes sold by a typical agent?

Short answer

The advent of technology leads to an increase in ATC, little change in MC, and a decrease in the number of homes sold by an agent, thereby reducing their economic profit in the short term. In the long term, agents can adapt by using technology to reduce costs and increase efficiency. This could lead to a decrease in MC and ATC and an increase in homes sold per agent.

Step-by-step solution

Determine the change in ATC and MC curves

Firstly, if half of the home sellers start using technology to sell their homes and no longer use agents, the number of homes a typical agent would sell will decrease. As the number of units sold decreases, the ATC (Average Total Cost), which is Total Cost/Quantity, would increase because the costs associated with selling a house (advertisements, staging, etc.) are spread over fewer home sales. The MC (Marginal Cost) would remain the same since MC is the change in total cost/change in quantity, and the costs associated with selling an additional home shouldn't change.

Analyze the impact on the number of homes sold and agent's profit

Given that there is less demand for their services, the number of homes sold by a typical agent would decrease. Economic profit, which is Total Revenue minus Total Costs, would also decrease. This is due to the increased cost per home sold (greater ATC) and fewer homes sold (less revenue), which cause the total costs to exceed revenue.

Analyze agents' responses

In reaction to this, less competitive or less efficient agents might exit the market because they are no longer able to make an economic profit. With the exit of some agents, the remaining agents will see an increase in the number of homes they sell (as they are sharing a smaller but still substantial market). Over time, this could result in a decrease in ATC (due to more homes to divide the total cost with) and a possible increase in economic profit (if their ATC goes down faster than the price they can charge does). However, with more sellers using a direct-to-buyer sales model, the number of homes sold by a typical agent could also still be less than in the original state.

Analyze long-term effects

In the long term, we might see a decrease in the MC and ATC as agents who decide to stay in the industry might try to use technology to reduce their costs. Also, if the market becomes too profitable, new agents might enter, which would increase competition, potentially decreasing pricing and reducing the economic profit of a typical agent. On the quantity side, the number of homes sold by each agent would depend on the competition and the number of sellers who prefer to sell through an agent.