Housing Grants and Wildfires
The question
The market for construction lumber in the country of Verland is initially in equilibrium. This spring the Verland government begins paying homebuilders a grant for every new house they break ground on, and during the same weeks wildfires burn through a large share of the standing timber that Verland's sawmills cut into lumber. Show the effect of these two changes on the market for construction lumber in Verland. Show the effect on the Supply and Demand graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Housing Grants and Wildfires: the worked answer
On the Supply and Demand graph, Demand shifts right and Supply shifts left.
Why Demand shifts right and Supply shifts left
The grant is paid to homebuilders, who are the buyers in the lumber market, so it raises the quantity of lumber they are willing and able to purchase at every price and the demand curve shifts right. The wildfires destroy standing timber, the key input for sawmills, which raises the cost of producing lumber and reduces what mills can offer, so the supply curve shifts left. Both shifts push the equilibrium price in the same direction, so price definitely rises. The two shifts pull quantity in opposite directions: the increase in demand on its own would raise the quantity traded, while the decrease in supply on its own would lower it. The change in equilibrium quantity is therefore indeterminate, and which way it goes depends on which shift is larger.
What happens to the equilibrium
The equilibrium price of construction lumber definitely rises, while the change in equilibrium quantity is indeterminate because it depends on whether the demand shift or the supply shift is larger.
The mistake students make on this one
Two errors show up here. The smaller one is reading the word "grant" as a producer subsidy and shifting supply right, when the money goes to homebuilders, who are buying lumber, so it lands on the demand side. The costly one is announcing that price rises and quantity rises: the demand shift adds to quantity while the supply shift subtracts from it, and since the stem never says which is bigger, quantity has no determinate direction at all.
On exam day
When the two curves shift in opposite directions, price is the determinate outcome, so state the price direction first and then write that quantity could rise, fall, or stay the same depending on the relative sizes of the two shifts.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Demand shifts right and Supply shifts left and every other curve on the Supply and Demand graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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