4. If the government levied a luxury tax on homes with more than 2,500 square feet of space, what is most likely to happen?
A. Such homes would be bought and sold in the underground economy.
B. Local property taxes on those homes would drop to keep demand high.
C. Construction of those homes would not decrease because supply is inelastic.
D. more resources would be allocated to the building of 2,400-square-foot homes.

The correct answer is D. If the government levied a luxury tax on homes with more than 2,500 square feet of space, more resources would be allocated to the building of 2,400-square-foot homes.

Explanation:

If the government were to increase taxes on buildings over 2,500 square feet, the demand for these buildings would most likely drop drastically, since this tax would mean a higher monthly maintenance cost for homeowners.

Therefore, this drop in demand would also cause supply to decline, since it would be uneconomical for builders to carry out projects of this type. Therefore, most of the supply would be allocated around buildings of less than 2,400 square feet of surface.