Question

Exercise 6.1

Assume that the parameter values in the model of housing tenure choice are as follows:

i= 0.03 (mortgage interest rate),

h= 0.02 (property tax rate),

d= 0.02 (depreciation rate),

g=0.04 (housing appreciation rate),

e=0.02 (rate of excess depreciation),

$\lambda$ =0.35 (landlord's tax rate).

A) Using this imporation, compute t, the critical consumer income-tax rate that separates renters and owner-occupiers. Note that in this computation, you are finding the intersection point of the flat rent line and the downward-sloping line corresponding to the owner-occupier's cost.

B) Suppose $\lambda$ increases to 0.40, and compute the new t. How do the relative sizes of the renter and owner groups change? Give an intutitive explanation for your answer, and illustrate your answer in the diagram.

C) Suppose $\lambda$ is back at 0.35 but that h increases to 0.03, and compute the new t. How do the relative sizes of the renter and owner groups chance? Give an intuitive explanation for your answer and illustrate it in a diagram (note that this diagram isn't as simple as that in (b)).

Answer 1

6-03 q 002 1 c> Lin Cost aina «iMoca user b enhr ㄒ landic's ax doule.

0 1-T (1-0.35(o 3+0-02 0-21538-

16) 5) user :ง.uo 302 C) 1.