Suppose that the current market rate of interest is 10 percent.The market rent on a parcel of land is $6,000 per year.A 10-percent land tax is imposed.As a result of the tax, the price of the land parcel:

Question

Quizplus · Accepted Answer

The price of the land parcel falls from $60,000 to $30,000 because the market rent of $6,000 per year, when taxed at 10 percent, reduces the net income to $5,400 per year. At a 10 percent market rate of interest, the value of the land is the net income divided by the interest rate, which is $5,400 / 0.10 = $54,000. However, the initial calculation was incorrect in the explanation; the correct valuation before the tax, based on a $6,000 rent, should indeed be $60,000 ($6,000 / 0.10). The correct post-tax valuation should be directly calculated from the impact of the tax on the rent, not from a misstated calculation. The tax reduces the net rent, affecting the land's value, but the precise impact needs clarification in this explanation.

Suppose That the Current Market Rate of Interest Is 10