Here's a puzzle of much practical interest to me.
Suppose you have two ways of buying an appliance.
1. Buy it outright from Home Depot. (sticker price is cheaper)
2. Have the home builder do it for you and include it in the price of
your home. (home mortgage is deductible)
The most natural way for me to attack this problem is to convert
everything into real monthly payments.
So then I figure that the monthly payment to Home Depot is essentially
the foregone return on stock:
Home Depot Price *
{(Nominal Stock ROR * [1-cap gains tax rate])-inflation}
And I figure the monthly payment on the mortgage is:
Builder Price *
{(Mortgage Interest * [1-family marginal rate])-inflation}
Does this look internally consistent to you? Is there anything this
approximation is ignoring (risk aversion aside)?
OK, suppose that:
Nominal Stock ROR=13%
Cap Gains Tax Rate=20%
Mortgage Interest=8%
Family Marginal Rate=40%
Inflation=2%
Find the critical price ratio that leaves you indifferent between Home
Depot and the Builder.
--
Prof. Bryan Caplan [EMAIL PROTECTED]
http://www.gmu.edu/departments/economics/bcaplan
"What a lot of trouble to prove in political economy that two and
two make four; and if you succeed in doing so, people cry, 'It is
so clear that it is boring.' Then they vote as if you had never
proved anything at all."
--Frederic Bastiat, "What Is Seen and What is Not Seen"
