Question: 7 Typical real-estate broker. “In California, the seller always pays the brokers commission, so, buyers get brokerage services free.”

MBA: “If the custom were for the buyer to pay the commission, then would sellers get brokerage services free?”

Real-estate broker, clearly losing patience: “That is purely hypothetical scenario, but if that situation were to arise, yes, I guess you’re right.”

(A) Assume that each seller pays a broker commission of $18,000. Then the supply of houses includes the cost of brokerage. Illustrate the market equilibrium with a price of $310,000 per house and sale of 200,000 houses a year.

(B) Now suppose that buyers rather than sellers pay the $18,000 commission. Using your figure, illustrate the following: (i) shift the supply curve down by $18,000 since sellers do not pay the commission, and (ii) shift the demand curve down by $18,000 since buyers now pay the commission.

(C) Compare the market equilibrium of (a) and (b) in terms of (i) the net price received by the sellers and (ii) the net price paid by the buyers. (Net prices are not brokerage commission, if any.)