01 May Question: According to the table at right, if the fourth and fifth largest firms in the industry merge, the…
Start with the demand side. The household in question has the following Cobb- Douglas utility function: The household also faces the following budget constraint: The above says that the household’s after-tax income, (1-T)Y, is divided between consumption of goods and services, C,, and the amount spent on housing services (r+0+ τ.)P,HH, . This latter variable can be thought of as the user cost of housing and consist of the rate of interest (r), the rate of depreciation (6) and residential 4 taxes (Tz). Saving is zero and you can think of this as representing a young household with no assets th debt. at finances the purchase of the house with 100 per cent
a) Using equations (1) and (2) to form the Lagrangian, derive an equation for the desired demand for housing (H). Find as well the equilibrium price of a house. b) We now introduce supply factors into the mix. Following the model in the text, suppose that residential investment is given by The productivity term (4) has been set equal to one and the variable X, is a composite input needed to produce homes as described in the text. The profits of this firm are given by: As in the text, P is the price of the composite input, which the firm takes as given. The firm, however, can control the size of the composite input. Use equations (3) and (4) to minimize the effect of the composite input on profits; that is find the maximum level of profits wrt X,. From that condition derive an investment function. Remembering that A-1 in this exercise, how does your investment equation compare to equation (21) in the text? What implications do you draw from this comparison? In the next step, sub into your investment equation the price of housing equation that you found in part a, which will give you an investment equation highlighting the underlining determinants. The stock of housing evolves according to: c)
Sub into (5) the equation you found for 1″ at the end of part b and solve for the long-run equilibrium level of the housing stock (H), noting that in the long run H-H-H 1+1 To find the long-run level of the price of housing, substitute your equation for H into the equilibrium price of housing equation you found in part a. Label the long-run house price as p” (that is, drop the subscript). d) Using you equations for p” and H, what is the effect of a rise in income, Yand separately, a rise in P? You will see that determining the effect is straightforward, so there is no need to take derivatives. In each case, use the long-run supply and demand diagram to determine which curve is shifting. Describe briefly what is happening. e) At the end of 2016, nominal housing wealth in Canada as a ratio of disposable income was approximately 4.2. The real rate of interest on mortgages was about 3 per cent, while depreciation and the residential tax rate are 2 and 4 per cent respectively. Use your model to find the implied value of n, the weight that households are assumed to place on housing services (equation (1) above)? Does you answer seem reasonable? You will need to show the steps taken to arrive at your answer
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.