Suppose you are a government analyst,and you want to help homeless families.To do so,you have decided to subsidize rental housing for poor families.(A subsidy is a payment by the government that pays part of the price of a specific product.For example,the government pays part of the rent payment. )If families had been choosing rationally before the subsidy,what is most likely to happen as a result of the subsidy?
A)The substitution effect will cause people to consume less rental housing as the price of housing falls.
B)The income effect will cause people to consume less rental housing,but only if rental housing is a normal or luxury good.
C)People will consume more housing and more of another good,for example,groceries.
D)Any rational person will respond by consuming more housing,and no more of the other goods he or she consumes.

Question

Quizplus · Accepted Answer

The subsidy effectively reduces the price of rental housing, leading to an increase in the consumption of housing due to the substitution effect. Additionally, the income effect allows families to consume more of other goods, such as groceries, because they have more disposable income.

Suppose You Are a Government Analyst,and You Want to Help