S. Klepper, Economics 73-100, Fall 2011


Solution to Mini-test 5


If the government builds one million new homes, it will have no effect on the market demand curve.  It will also not affect the marginal cost curve of private producers of new homes, and therefore private producers will continue to supply the same number of new homes at each price in the short run.  With the addition of one million new homes which the government is willing to sell at the going price, the total quantity supplied (by private producers and the government) will increase by one million at every price.  This is pictured in the figure below by the shift in the supply curve from S­0 to S1.  The shift in the supply curve causes the price of new homes to decline from p0 to p1 and the quantity of new homes sold to increase from q0 to q1.  The decrease in price reduces the quantity of new homes supplied by private producers.  Thus, private producers sell less new homes, so that the net increase in the number of new homes sold is less than the additional one million homes supplied by the government.  There is an increase in the number of new homes sold, though, which implies that private producers decrease their sales by less than the one million new homes offered by the government.


Based on this description, the answers to the individual questions are:


_____1. False


_____2. False


_____3. True


_____4. True


_____5. False