Suppose a household has the following housing demand function Qh = (0.2 (I I)) / ph Where Qh is the square footage of the house that the household chooses, and is the income tax rate, I is the household's income, and ph is the price of housing per square foot. So the household always spends 20% of its after-tax income on housing.

1. (7 points) If the household's income is $10,000, the income tax rate is 0.25 (or 25%), and the price of housing per square foot is $10, how many square feet of home will the house demand? Please show how you found your answer. 2. (7 points) Now suppose that the government wants to help households with their housing costs by making all housing costs tax deductible. Given that housing costs are tax deductible, what is the effective after-tax cost of a square foot of housing? Please show how you found your answer. 3. (8 points) Write down the demand function incorporating the fact that housing is tax deductible. 4. (8 points) How much total housing will the household consume under the new tax deduction rules? Please show how you found your answer. 5. (10 points) How much income tax revenue does the federal government lose when it allows housing costs to be tax deductible? In order to determine forgone income tax, compare the income tax revenue the government receives before and after allowing hous- ing costs to be deductible. Please show how you found your answer. 6. (10 points) If instead of allowing housing to be tax deductible, the government gave households a tax rebate equal to the amount of income tax it foregoes in part (5) and the household treats this rebate as equivalent to income (so just adds it to its after-tax income) how many square feet of housing will the household consume? How does this compare to your answer in part (4)? Provide some economic intuition for why these results are either the same or different. Please show how you found your answer