Econ 144B URBAN ECONOMICS MID-TERM WINTER 2022 STUDENT NAME: STUDENT ID: Quick Instructions/Reminders: O 0 Write your NAME and STUDENT ID on the front page of your Follow ALL mid-term instructions as listed in the class announcement. Show detailed work in order to be considered for full credit. QUESTION 1 (18 points) Consider two countries A and B. Suppose that, in country A, the excess depreciation e that landlords can deduct in computing their taxes is high, but that e is low in country B i.e. ед > еB. All other parameters of user-cost mortgage interest rate (i), property tax rate (h), rate of depreciation (d), rate of house-price appreciation (g), house value per unit (v) and landlord's income tax rate (2) _ - are the same across both countries. a) Clearly write down the formula for user-cost of homeowners in both countries. User-Cost for Homeowners in A = User-Cost for Homeowners in B = (2 points) b) Clearly write down the formula for user-cost for renters in each country. (3 points) User-Cost for Renters in A = PA= User-Cost for Renters in B = PB= Department of Economics Page 1 of 10 UC Irvine Econ 144B MID-TERM URBAN ECONOMICS WINTER 2022 c) Which country has a higher user-cost for renters? Circle the correct answer Country A Country B d) Explain your answer to part (c) in 1-2 sentences. (1 point) (2 points) e) Present a clearly labeled graph of the user-costs for homeowners and renters as a function of tax-rate (7). Use the same graph for both countries (it will help further analysis). For each country, clearly indicate the tax-rate that separates the incentive to home-own versus rent. Label them TA and TB, respectively. (4 points) Department of Economics Page 2 of 10 UC Irvine Econ 144B URBAN ECONOMICS MID-TERM WINTER 2022 f) Based on the graph, you can conclude the following (circle correct alternative): (1 point) i) Country A has more homeowners compared to Country B. ii) Country A has more renters compared to Country B. g) Explain your answer from part (f) in 1-2 sentences. (2 points) h) Now assume that e is the same in both countries but the rate of house-price appreciation g differs with gå > gB. This difference will result in relatively more homeowners in country A than in country B. (Circle the correct alternative.) True False (1 point) i) Explain your answer from part (g) in 1-2 sentences. (2 points) Department of Economics Page 3 of 10 UC Irvine Econ 144B URBAN ECONOMICS MID-TERM WINTER 2022 QUESTION 2 (15 points) The nation of Freelandia is a small country the size of a neighborhood with one factory. A new candidate is running for office and wants your advice on potential policies to improve Freelandia. You advise the candidate to focus on the pollution generated by this factory. Currently, there are no government regulations regarding pollution in Freelandia. As an economist you plan to use the following graph to explain your policy idea. $ 7 6 5 4 B 3 2 C 1 A H D E G F Pollution Level (P) 0 1 2 3 4 5 6 (a) Label the two curves on the graph above. (1 point) Explain the current no regulation situation in Freelandia by answering the following questions: (Note: just list the letters corresponding to the area, no calculations are necessary) (b) How much pollution is currently being produced? (1 point) (c) What area corresponds to the total damages caused by pollution? (1 point) (d) What area corresponds to the total benefits caused by pollution? (1 point) (e) What is the current social surplus from this level of pollution? (1 point) Department of Economics Page 4 of 10 UC Irvine Econ 144B URBAN ECONOMICS MID-TERM WINTER 2022 (f) What level of pollution would lead to the highest social surplus? (2 point) (g) Propose and explain in detail any one policy that the politician could use that would increase the social surplus of Freelandia. (5 points) (h) Circle the group that would oppose your proposed policy. (1 point) Factory Residents (i) In order to gain their support, how much would this group need to be paid? Explain. (Again, just list letters corresponding to the area, do not calculate any value.) (2 points) Department of Economics Page 5 of 10 UC Irvine