Consider an economy with three equal sized economic classes

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Consider an economy with three equal sized economic classes: the poor, the middle class, and the rich. At currently prevailing prices, the rich buy new houses and after 20 years sell them to the middle class. The middle class buy 20 year old houses and after another 20 years sell them to the poor. The poor buy 40 year old houses and hold them for another 20 years at which point the units are retired. Suppose that, in an effort to make housing more affordable, the government provides a rental subsidy for the occupiers of units more than 20 years old.
a) What are the likely effects of this subsidy on the price of housing units more than 20 years old and the price of housing units less than 20 years old?
b) How might the behavior of the three income groups change in response to these price changes?
c) Which groups are likely to benefit from this subsidy?

Reference no: EM13729512

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