Urban Economics, Problem Set #6
due Wednesday, Apr 16, 11pm EST,
one-single file and online only.
resubmissions are possible before the deadline.
only Word, Excel and PDF formats
(1) Urban Labor Market (3 pts + 7 pts)
In a city, labor supply is given by w=20+0.1Ls, where w denotes the wage. Labor
demand is given by w= 180-0.5Ld.
(a) Calculate the equilibrium labor quantity and the corresponding wage. (3 pts)
(b) Now assume the city imposes an environmental tax of $5 per unit of labor on firms.
As a result, companies will now lower their willingness to pay for labor by $5 per worker.
The city uses the money to beautify the local park, which attracts many workers to the
city. An economic consultant firm finds out that the labor supply curve will shift because
workers will be happy with a wage that is $12 lower than before the improvement (at
any quantity of labor). Calculate the new equilibrium wage and the new number of jobs.
Will the number of jobs increase or decrease compared to (a)? (7 pts)
(2) NPV (10 pts)
Assume you will get 50 rental payments paid over 50 years at the beginning of each
year. Initially the rent equals R=$10; but it will grow at a rate of g=1% per year. The NPV
of this income stream equals $242.76. What is the discount rate? Provide your answer
as percentage with two decimals, e.g., 1.23% (or 0.0123). You can solve this
mathematical or simply use Excel. Either way, show your work.
Note, when including g --- you can do this as in Gordon’s Model --- as (i-g).
(10 pts)
(3) NPV (15 pts)
Assume you will receive constant rental payments over a time period of 66 years. For
the first 33 years, you will receive a rent of $33 at the beginning of each year. For the
next 33 years thereafter, you will receive $66 at the end of each year. In addition, due to
illness, you will not get paid in the 44th year.
Employing the equation for identical payments over a limited time period, show how you
would alter this equation applied to this problem. Plug in the numbers given in the
question.
Assume your discount rate is 4%. Calculate the resulting net present value of this
income stream.
(4) NPV (5 + 5 pts)
Assume you will get 111 payments of $20 annually at the end of each year. What is the
difference to a payment scheme were you get the payments at the beginning of each
year?
The discount rate i equals i=10%
a) calculate the difference for g=0
b) calculate the difference for g=1%
(5) Gordon’s Model
Assume there are two plots of vineyard land, X and Y. If X costs twice as much as Y
and rents and discount rates are the same for each plot, the price difference can only be
caused by different growth rates.
a) For both plots, provide an abstract equation for the growth rate g. Denote plot Y’s
price “NPV.”
b) Based on your answer to (a), and assuming that the price-to-rent ratio for plot Y
equals 16 and i=0.06. What are the respective growth rates ? Report 3 percent-
decimals, e.g., 2.223%.
(6) Mortgage Rates and Home Prices (18 pts)
Refer to the 30-year mortgage rates as posted on Brightspace under “Content,.”
a) When did mortgage rates reach their historical high (year and month); how high
was it? (1 pt)
When did mortgage rates reach their historical low (year and month); how low
was it? (1 pt)
What is the current 30-year mortgage rate (Mar 1, 2025)? (1 pt)
b) (15 pts) Now go to the Federal Reserve’s data website FRED and download the
“S&P/Case-Shiller 20-City Composite Home Price Index“
[Link]
Drawing on these two monthly data series, create a scatterplot with the 30-year
mortgage rates on the x-axis and the composite home price index on the y-axis.
Since the Case-Shiller Index only covers the period from Jan 2000 to Sep 2024,
you will have x-y pairs for this time period only.
In Excel, run a simple linear regression
Home Price Index = b0 + b1*MortgageRate
and show it in your scatterplot (use the Trendline function in Excel). In your Excel file,
show all data and the chart
Below is an example with made-up data.
Home Price Index and 30y Mortgage Rates
y-axis: S&P/Case-Shiller 20-City Composite Home Price Index
(Source: FRED); x-axis: 30-year mortgage rate (Source: FreddyMac)
260.0
240.0 y = -99.9999x + 99.99
220.0
R² = 0.999
200.0
180.0
160.0
140.0
120.0
100.0
80.0
2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
