Consider the market for homes in Southern California to init

Consider the market for homes in Southern California to initially be in an equilibrium. The tax rate for households in California increases. Which panel best describes what will happen to the housing market?

A.

Panel A

B.

Panel B

C.

Panel C

D.

Panel D

Now consider that the tax rate for households in California increase AND the government lowers the tax rate for housing developers that are building new homes. Considering the aforementioned facts on a demand and supply graph, how will the equilibrium of homes change? (The numbers 1 and 2 DO NOT necessarily correspond to the starting and ending curves.)

A.

The equilibrium will be at A before the tax breaks and E after the tax breaks.

B.

The equilibrium will be at A before the tax breaks and C after the tax breaks.

C.

The equilibrium will be at B before the tax breaks and E after the tax breaks.

D.

The equilibrium will be at B before the tax breaks and C after the tax breaks.

	A.	Panel A
	B.	Panel B
	C.	Panel C
	D.	Panel D

Panel (d) Panel (e) Panel (b) Panel (a) D, o2 D.2 D, D, Di Quantity Quantity Quantity

Solution

The tax rate for households in California increases which will reduce the disposable income so that demand curve will shift leftward which is described by PANEL (D).

For the second question:

The tax rate for households in California increases which will reduce the disposable income so that demand curve will shift leftward and the government lowers the tax rate for housing developers that are building new homes so that their cost of developing new houses decreases, therefore, the supply curve shifts rightward and this scenario is best describes by PANEL (D). i.e. the equilibrium will be at B before the tax breaks and C after the tax breaks.