Urban Econ PS 5 Answers.pdf - Urban Economics Problem Set#5...

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Urban Economics Problem Set #5 Question 1Go to -calculator.html?ref=economy&_r=0&abt=0002&abg=0 (In case this link does not work: go to and search for “The Upshot Is It Better to Rent or Buy”) Keep all default assumptions and assume the home you want buy costs $600,000. The resulting “break-even rent” is then $1,985 (note: you can simply enter the home’s price instead of adjust it on the graph). We are now interested in the effect of various variables on the “break-even rent.” Calculate the “break-even-rent-elasticities” of the a) mortgage rate b) home price growth rate c) rent growth rate d) investment return rate e) inflation rate f) property tax rate g) marginal (income) tax rate For each variable assume an increase by 10%. For variables that are measured in % use a percentage of the percentage. For instance, if inflation were 4% a 10% increase results in a 4.4% (and not a 14%) inflation rate. Also, for each variable hypothesize why the “break-even rent” will be increasing or decreasing (just one sentence). Then relate this to the resulting percentage change in the break even rent. Note: Make sure you always go back to the default adjustments when you calculate the elasticity of a new variable. break even rent from to from to %change Elasticity a) mortgage rate 3.67% 4.04% 1985 2083 0.0494 0.4937 b) home price growth rate 3% 3.30% 1985 1856 -0.0650 -0.6499 c) rent growth rate 2.50% 2.75% 1985 1963 -0.0111 -0.1108 d) investment return rate 4% 4.40% 1985 2042 0.0287 0.2872 e) inflation rate 2% 2.20% 1985 1990 0.0025 0.0252 f) property tax rate 1.35% 1.49% 1985 2044 0.0297 0.2972 ) marginal income tax rate 20% 22% 1985 1948 -0.0186 -0.1864

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