S. Klepper, Economics 73-100, Fall 2009

Quiz 5

Consider the market for new homes in the United States. In order to stimulate the market, the government is considering offering buyers a subsidy of 20% of the price charged for new homes. Under this plan, sellers would collect the full price charged for new homes, and the government would give buyers a payment equal to 20% of the price of the new home they purchased. All references below to the market demand and supply curves pertain to the quantity demanded and supplied at the full price of new homes charged by sellers.

Which of the following statements concerning the effects of the subsidy in the short run are correct? Mark true for a correct answer and false for an incorrect one and provide explanations for each of your answers.

_____1. The market demand curve for new homes will shift to the right.

_____2. The market supply curve for new homes will shift to the left.

_____3. The price of new homes charged by sellers will rise.

_____4. The number of new homes sold will increase.

_____5. The total revenues of all sellers of new homes (i.e., the total revenue taken in by all sellers as a group) will increase.