Microeconomics 6th Edition by Robert Hall, Shirley Kuiper, Marc Lieberman

Exercise 3

Suppose you buy a home for $200,000,making a $40,000 down payment and taking out a mortgage for the rest. The annual interest rate on your mortgage is 5%,which is also the interest rate you can earn when you invest your funds elsewhere. (Ignore any possible tax benefits from your mortgage,as well as commissions or fees from buying or selling a home.)a. If the price at which you could sell the home remains at $200,000,what is your annual interest cost of home ownership? [Hint: Be sure to include both actual interest payments and foregone interest.]
b. Suppose that,after a few years of owning,you still owe the same amount on your mortgage,but you could now sell your home for $300,000. If you continue to own,what is your annual interest cost now? [Hint: When calculating the foregone interest component,note that if you sell your home,you'll have to pay off the mortgage.]