Question

Suppose you operate a small manufacturing firm in Long Island City and you recently developed a unique, new production process that will allow your shop to earn $500 more per month in profit. Your landlord hears about this and smiles since she remembers from her urban economics class that all economic development benefits accrue to landowners. She says, “Since the supply of land is inelastic, you will now have to pay me $500 more per month in rent.” Is your landlord correct? Explain.

Answer 1

Solution:

I agree to the landlord's statement that supply is inelastic but I diagree to her statement that I should be paying $500 more per month in rent.This is for two reasons:

1.Firstly,supply of land is inelastic but it is not perfectly inelastic , so I can get a land in some other place may be atleast for a little higher price(but not at a price higher by $500 per month) if not at the present prevailing price (or) lower. I would tell the lanlord that I have an option to shift over there.

2.Secondly,I would say that since I accrue an additional $500 every month, I would pay her the enhanced rent but will make sure to negotiate as much as possible so that the enhancement will be less than $500 per month because only then I would be able to enjoy the fruits of developing the unique ,new production process.

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