In the most recent issue of The Economist (January 18, 2020), a special report cover current housing markets and considers the question of uhy the obsession" with home ownership can be harmful. economically are not building enough housing. Limited housing can limit economie growth, and can lead to expensive housing in eities like London, San Francisco, and Sydney, among others (see Housing Report, p. 3). The report notes that major cities that are thriving Consider the following game, hetween a landlord, who owns a condominium, and the tenant who rents the condo, in a tight housing market such as San Francisco's. Suppose the renter's lease will be up soon. The renter has three options. He can offer to buy the condo; he can renew the lcase, with a rent increase, to reflect the market rate; or he can not renew the lease. After the renter makes his decision, the landlord will make a decision about whether to repovate the condo or not: assume that the landlord makes her decision after the renter has decided which action to take. If the renter offers to buy the condo, he will incur significant debt from the mortgage. Further, if the landlord renovates, the renter will have an even larger mortgage, reflecting the higher assessed value of the renovated property. If the renter renews the lease at the market rate, the renter would prefer to live in a renovated condo, with more modem amenities. If the renter does not renew the lease, the renter will be in a bind trying to find alternative housing; further, if the landlord renovates after the renter walks away, the renter will also feel some regrets about his decision. From the landlord's perspective, if the renter offers to buy the condo, the landlord would prefer to renovate (versus not), as she will get a higher price by the time the negotiations and sale are finalized. Given the real-estate market conditions, the condo's value will increase by even more than the cost of the renovation. However, the landlord generally prefers to continue owning the property, and making long-term income off of the rental versus selling. If the renter does not renew the lease, the landlord will benefit from renovating the apartment (versus not) in attracting a new tenant at the market rental rate or higher (although, renovating is costly). Suppose that the net payoffs to the renter and to the landlord, in terms of the tradeoffs discussed above, are as represented in the extensive-form game on the following page. Identify all pure strategies for each player. Find the rollback equilibrium strategies (that is, from among the pure strategies you identified in part a, identify the one that each player will choose in the rollback equilibrium). Use the "pruning" method to show your derivation. Describe the equilibrium path of play. Briefly explain this outcome. a. b. . PROBLEM #3 CONTINUED (200, 500) Renovate Landlord Offer to Buy Keep Condo As Is (300, 400) (500, 600) Renew Lease Renovate Renter Landlord Keep Condo As Is (400, 700) Not Renew Lease Renovate (50, 300) Landlord Keep Condo As Is (100, 100) Payoffs: (Renter, Landlord)