Figure 2. nders achmann $6,300 ormack $4,950 $3,600 Farmers Xerxes erglin abrows

Question

Figure 2. nders achmann $6,300 ormack $4,950 $3,600 Farmers Xerxes erglin abrowski The diagram above shows 3 parcels of farmland lying on the north bank of the great grey-green, greasy River, all set about with fever-trees. The names on the parcels are those of the landowners. Assume that each those of the farmers who rent the parcels in the first year Below the diagram are farmer uses $45,000 of capital (farm equipment): we'll ignore labor, fertilizers, and depreciation on equipment. Assume also that the typical, readily available, rate of return on capital investment in this market is 8% per year Gross Income % rate of return Farmer Xerxes Yerglin Zabrowski In the first year the landlords charge no rent, i.e., rents = $0. How much gross income, and I. t percent rate of return on investment, will each farmer earn? 2. Will any of the farmers have an incentive to bid a nonzero rent under these circumstances? Explain briefly 3. In the second year, farmers engage in competitive bidding. How much rent will each landlorod receive? How much gross income, and what percent rate of return on investment will each farmer earn? Gross Income % rate of return Landlord Anders Bachmann Cormack Rent Farmer Xerxes Yerglin Zabrowski 4. Say now the price of hay (grass being the crop grown along the banks of the river) rises sharply What effect will this have on landlords' rents? On farmers' rates of return? Explain briefly

Explanation / Answer

Answer-1

in the first year rent is zero and investment is $45000 and return of scale is 8%.

So. Gross income = 45000 * 8/100

farmer

Gross income

% rate of return

xerxes

3600

8%

yergilin

3600

8%

zabrowski

3600

8%

Answer-2

Under the nonzero rent none farmer will invest in land because return from land is $3600 and minimum rent is $3600. In this situation income/profit is 0 or there is loss in investment.

Answer-3

Return of capital from land is 8%, so each farmer will earn $3600 from his investment, and in competitive bidding farmer will earn normal profit which is close to zero mean farmer will try to give landlords $3600.

landlords

rent

Anders

3600

bachmann

3600

cormak

3600

farmer

Gross income

% rate of return

xerxes

0

0%

yergilin

0

0%

zabrowski

0

0%

Answer-4

If price of grass will increase then all the increase profit will go to rent because bidding on rent is competitive and farmer will still earn almost zero profit.

farmer

Gross income

% rate of return

xerxes

3600

8%

yergilin

3600

8%

zabrowski

3600

8%

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