My question: Does a google penalty ALWAYS affect the entire site, or can it affect only certain pages, folders, etc? My homepage ranks but all my other pages aren't indexed. I'm trying to figure out if its a penalty or duplicate content. I know it seems like a duplicate content issue, but I've tried to fix that with no results.
Most of the time, it will effect the entire site. The bots will see the main index page and if there is a penalty, they will not crawl the rest of the website. It may just be that there is something blocking the bots from indexing your website, or it may just have not gotten to it yet.
In the past I think Google only penalized an entire website. I've read about a few people who have had certain pages possibly penalized since the end of July. Since this hasn't happened to me, I haven't really looked further into what would cause such a page specific penalty.
I have seen other pages rank higer than the home page in some cases, and of course, I have seen a good rank for the homepage and none for other pages as well. It really depends on many factors that google explains in their patent. They commonly refer to pages and websites as "documents" because even the homepage, is a "document" or page also.
Some penalties like the -30 are site wide. While others like the -950 are page or even search term specific. If your home page ranks for keywords, but the rest of your content isn't indexed then you are correct in assuming that you need to look at those pages to see if they are duplicate content. Make sure you have unique page titles and descriptions...and of course you shouldn't be coping text from one page to another on your site or anywhere else. If you don't have a duplicate content issue, then it might simply be that you need more links back to your site so Google will crawl deeper.
It really depends on the situation and the penalty. I used to have hidden text in one of my websites, till it suffered a penalty. It was in dec/06. Since then, sometimes, when Google cached a new version of my website, it got not the real cache, but the anterior and troubled version. Always that had happened, my homepage suffered, but any other pages.