In 2009 and 2010 the US government instituted a program where all first-time
homebuyers received an $8,000 tax credit upon the purchase of a new house. In
April 2010, just prior to the credit’s expiration, sales rose 7.6% and the median US
home price rose 4% to from $167,000 to $174.000. Assume that all buyers received
the $8,000 subsidy.
(a) Show the effects of the subsidy on a graph.
(b) Assuming that all buyers received the credit, estimate the own price elasticity of
demand and own price elasticity of supply
(c) Who gained more from the subsidy, buyers or sellers?
Exercise 3: Wine production
In wine production, raw materials (grapes) are the single biggest cost. The cost of
the grapes may be as much as 60% of total production costs but varies greatly from
lower-quality inexpensive wines to the highest quality wines. The second-highest
cost for many vintners is the barrels used to ferment the wine. French oak barrels
cost as much as $700 apiece and last only a few years. The other major production
cost, other than the actual physical plant where the winemaking occurs, is time.
Quality wines spend 2–2 ½ years aging in barrels and then an additional 8 months in
bottles before being ready for sale.
(a) How much substitutability do you suppose exists between inputs in winemaking?
How might this factor affect efforts to cut costs?
(b) If a firm were to find a new technology that cut the required
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