Homebuilders will often pay the closing costs (title, insurance, ...

[ereecah]

Homebuilders will often pay the closing costs (title, insurance, etc.) of prospective homebuyers? Explain in terms of supply and demand what homebuilders are trying to do with this practice.
 
  What will be an ideal response?

Question 2

Why do some utilities have an incentive to exaggerate their costs of production?
 
  What will be an ideal response?

[Danny Ewald]

Answer to Question 1

The homebuilders are simply trying to stimulate demand. By offering to pay prospective homebuyers' closing cost it is almost the equivalent of handing these buyers extra income. Their ability and willingness to pay has increased. It can bring buyers into the market who would able to afford to buy a home except for the obstacle of having to come up with the cash for closing costs.

Answer to Question 2

Because utilities are generally allowed to charge prices that cover their average cost of production, a utility might want to incur higher than normal costs (maybe from lush carpets, hunting lodges, tickets to sporting events, and so forth). If the utility exaggerates its costs, the regulators are likely to simply order higher rates to cover the higher costs, and so the utility executives can enjoy benefits (the carpet, hunting lodge, sporting events) without incurring any personal costs.