Finishing Up Chapter 7 © Allen C. Goodman, 2002. Flexible Farmer Output = 20 tons Price = $15 Transport Costs = $4/ton-mile Pre-rent profit = Total revenue.

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Presentation transcript:

Finishing Up Chapter 7 © Allen C. Goodman, 2002

Flexible Farmer Output = 20 tons Price = $15 Transport Costs = $4/ton-mile Pre-rent profit = Total revenue - Nonland costs - Transport Costs Rent = Pre-rent profit/farm size

Table 7-1 Flexible Farmer Dist.SizeT ot R ev N-L TC PR  Rent/acre

Flexible Farmer The more flexible the production, the more convex the rent gradient. If no flexibility, the rent gradient is linear.

Who locates where? Generally, the higher the transport costs (either higher per ton-mile, OR higher weight), the closer to the market. They will outbid the others. This is sometimes called, by land developers, “highest and best use.”

Market Interactions d1d1 d2d2 D1D1 D2D2 Price of Corn Price of Land P1P1 P2P2 R1R1 R2R2 Quantity of Corn Quantity of Land

Let’s do a problem i. All of the land is initially used by tenant farmers to grow indigo ii. Price of indigo is determined in international mkts iii. Tenant initially pays landowner 30% of the indigo harvest iv. Output/acre = 1000/yr.; Price = $2/unit v. Interest rate = 10%/yr.

Problem 7.3 P = 2; Q = 1000; so total revenue = Initial rent = 0.3*harvest = 300 units, or $600. a. Compute nonland costs and mkt. value of land Nonland costs = Total revenue - Rent = = Value = 600/0.10 = $6000.

Problem 7.3 b. Suppose price of indigo falls to $1.90 Compute eq’m rent in (a) $; (b) units of indigo; (c) % of indigo harvest Rent = Total revenue - Nonland costs = = $500. Units of indigo = $500/($1.90/unit) = 263 As %, rent = 26.3% of indigo harvest.

Problem 7.3 c. How much does market value of land drop? Previous value was $6000. New value is $500/0.10 = $5000, so value falls by $1000/acre.

Problem 7.3 d. What if there was an alternative crop whose price didn’t fall? What would happen to market value of land. Growers might see more potential profit, and bid up rents. We might see a different crop, and a smaller decline in rents.