Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at $200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the homes value. If properly maintained, the houses real value is not expected to change. The real interest rate in the economy is 6 percent, and Ellie and Vince can qualify to borrow the full amount of the purchase price (for simplicity, assume no down payment) at that rate. Ignore the fact that mortgage interest payments are tax-deductible in the United States.

Ellie and Vince would be willing to pay $1,500 monthly rent to live in a house of the same quality as the one they are thinking about purchasing. Should they purchase or not buy the house?

Instructions: Your answer should be purchase or not buy.

They should ______ the house.

Now assume that Ellie and Vince would be willing to pay $1,500 monthly rent and that the real interest rate is 6 percent. If the developer offers to sell Ellie and Vince the new house for $150,000, should they buy the house?

They should ______ the house.