Illustrate graphically the effect the credit market crisis in the United States in 2008 had in the market for existing single-family homes.
Assuming the demand for existing single-family homes is relatively inelastic, what is likely to happen to the total revenues of home sellers as a result of the credit market crisis?
ANSWER
The credit market crisis resulted in a large increase in the number of home foreclosures, which in turn dramatically increased the supply of existing single-family homes that were for sale, i.e, the supply curve for existing homes shifted right, causing equilibrium price to fall. Assuming the demand for existing single-family homes is price inelastic, the price effect would dominate the quantity effect on total revenue and the total revenues of sellers of single-family homes would decrease.
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