Question

In: Economics

This exercise adopts the common meaning of “rent”, to denote the payment made to be able...

  1. This exercise adopts the common meaning of “rent”, to denote the payment made to be able to use something (here, land) for a given amount of time (here, one year). The exercise illustrates: (i) how rent is determined in a competitive market, (ii) the relation between land rent and landprice, and (iii) the distinction between “pure” rent and quasi-rent.

    There is a fixed stock of unimproved land, L = 10. The annual value of marginal product of land is 20 − q, where q is the amount of land that is rented.

(a) Denote the annual rent for a unit of land as f. What is relation between the value of marginal product of land and the inverse demand for land rental? Using the answer to this question, and the fact that the equilibrium rent equates supply and demand, find the equilibrium value of f.

(b) What price would someone with an annual discount rate of r be willing to pay to buy this land? Your answer gives the price as a function of the discount rate; recall equation 2.13. (The price of land is the amount that someone pays to buy the land; the land rent is the amount they pay to use it for a period of one year.)

(c) If the land is improved, its value of marginal product increases by 2. If q units are improved, the value of marginal product increases from 20 − q to 22 − q. What is the equilibrium annual rental rate, and what is the equilibrium price, if the entire stock of land is improved?

(d) Suppose that the cost of improving an acre is 15. What is the critical value of r at which the landowner is indifferent between leaving (all of) the land in its unimproved state, and improving all of it?

(e) If the land is improved, what fraction of the rent (or the price) is pure rent, and what fraction is quasi-rent.

Solutions

Expert Solution

i)According to classical theory rent can be define as the money that land owner earns by leasing out his land for productive purpose. According to Ricardio only land owner can earn rent income though this Ricardio theory is based upon certain critical assumptions. But according to modern theory not only land owner but any factor of production can earn rent income. In competitive market rent is determined by interaction of demand for land and supply of land to obtain a rent amount for the land.

ii)Rent is the income owner is getting by leasing out his land for productive purposes where as land price means the amount of money someone needs to give to owner to transfer the ownership permanently in his name. But there is a positive relationship between land price and rent. Because increasing of land price means that due some reason the productivity of land increases and if productivity of land increases then amount of rent should also increase.

iii) Pure rent is the payment to the land But quasi rent is Payments to the factors like labour, capital etc. Pure rent is permanent phenomenon because supply of total land is fixed but in quasi rent the factors like machines snd buildings are temporarily limited. So quasi rent is a temporary phenomenon.


Related Solutions

Adjusting Entries - Round to two decimal places. 27. The rent payment made on June 17...
Adjusting Entries - Round to two decimal places. 27. The rent payment made on June 17 (3600 )was for June and July. Expense the amount associated with one month's rent. 28. A physical inventory showed that only $259.00 worth of office supplies remained on hand as of June 30. 29. The annual interest rate on the mortgage payable was 9.00 percent. Interest expense for one-half month should be computed because the building and land were purchased and the liability incurred...
Coupon Rate as mentioned is 8.750% Payment Frequency is Semi Annually meaning payment to be done...
Coupon Rate as mentioned is 8.750% Payment Frequency is Semi Annually meaning payment to be done two times in a year. Offering Date is 01/05/1983 Maturity Date is 01/15/2023 Offering Price is $99.45 FV = 100 Trading Price = 105.06 A. Using the offering price found in step 3 and assuming the FV = 100 what is the YTM of your bond on offering (This means compute the YTM as if today was the offering date, show all work). B....
How is “imputed rent” determined by a statistical agency? If the imputed rent adjustment wasn’t made...
How is “imputed rent” determined by a statistical agency? If the imputed rent adjustment wasn’t made to GDP, what would happen to GDP if the fraction of households that rent their homes increased?
Calculate the monthly payment on a $220,000 mortgage if payment is made at the beginning of...
Calculate the monthly payment on a $220,000 mortgage if payment is made at the beginning of each month, and the annual interest rate is 3.75 percent for 20 years. Group of answer choices $1,304.35 $1,300.29 $1,319.25 $1,355.65
1) The account title used for recording the payment of rent in advance for an office...
1) The account title used for recording the payment of rent in advance for an office building is ________. A) Prepaid Rent B) Rent Payable C) Rent Revenue D) Rent Expense    2) Which of the following is an asset account? A) Wages Payable B) Notes Payable C) Unearned Revenue D) Accounts Receivable    3) A customer's promise to pay in the future for services or goods sold is called a(n) ________. A) Accounts Receivable B) Accounts Payable C) Unearned...
Explain the meaning of the term rent seeking and illustrate graphically how it could undermine efficiency...
Explain the meaning of the term rent seeking and illustrate graphically how it could undermine efficiency in the economy
The appropriate formula or steps to compute the following: 1. Rent (or payment amount for future...
The appropriate formula or steps to compute the following: 1. Rent (or payment amount for future value) 2. Number of periodic rents (payments) 3. Unknown interest rate (ordinary annuity) 4. Rent (or payment amount for present value) 5. Future value of a deferred annuity 6. Present value of a deferred annuity
Which level of economic integration eliminates trade barriers between member countries and adopts a common external...
Which level of economic integration eliminates trade barriers between member countries and adopts a common external trade policy? A) political union B) customs union C) common market D) economic union The ________ refers to the institutional arrangements that govern exchange rates. A) World Bank B) international monetary system C) currency exchange D) gold standard What are two impediments to countries integrating?
Exercise : Enzyme-Linked Immunosorbent Assay (ELISA) At the conclusion of this exercise you should be able...
Exercise : Enzyme-Linked Immunosorbent Assay (ELISA) At the conclusion of this exercise you should be able to: explain the principles of the enzyme-linked immunosorbent assay (ELISA). determine the qualitative results of a clinical scenario using ELISA. understand the purpose of the reagents used in ELISA. Background Immunology is the study of the immune response. This involves the interaction between antigens, antibodies, and cells. Immune responses are generated by the body to recognize substances considered to be “foreign”. Microorganisms can generate...
Question 4 [14]Explain the meaning of the term ‘rent seeking’ and illustrate graphically how it could...
Question 4 [14]Explain the meaning of the term ‘rent seeking’ and illustrate graphically how it could undermine efficiency in the economy. Subject: Governmental economics 20A
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT