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...

 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),

λ = 0.35 (landlord ’ s tax rate).

( a) Using this information, compute τˆ, the critical consumer incometax

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 λ increases to 0.40, and compute the new τˆ . How do the

relative sizes of the renter and owner groups change? Give an intuitive

explanation for your answer, and illustrate your answer in a diagram.

(c) Suppose λ is back at 0.35 but that  h increases to 0.03, and compute

the new τ ˆ . How do the relative sizes of the renter and owner groups

change? 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)).

Please give me the detail of every step. thank you