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),

= 0.35 (landlord ' s tax rate).

(a) Using this information, compute _hat, 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 increases to 0.40, and compute the new _hat. 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 is back at 0.35 but that h increases to 0.03, and compute the new _hat. 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)).