Embed Size (px)
DESCRIPTION
Microeconomics. 2006. Question 3. PRICE. Supply. Pe. Demand. Qe. QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES). The supply and demand for land for residential develop- ment is shown in the diagram above. The land supplied - PowerPoint PPT Presentation
Citation preview
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
3. The supply and demand for land for residential develop- ment is shown in the diagram above. The land supplied
for such development comes from privately held open- space land or privately held farmland.
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
a) Redraw the graph above and show how an increase in income will affect the equilibrium price and quantity of land converted into residential development, assuming that the land for residential development is a normal good.
Demand 1
Pe1
Qe1
E1
E2
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
b) Redraw the graph above and show how a decrease in government per-unit subsidies to farmers will affect the equilibrium price and quantity of land converted into residential development.
Supply 1
Qe1
Pe1E2
E1
Note: If you assume the Subsidy was for “selling” land, then any decreaseWill shift Supply to the left.
Generally speaking: less subsidy shifts supply left more subsidy shifts supply right
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
c) Assume that the conversion of open-space land and farmland imposes costs on the general population, which can no longer enjoy the scenic vistas.
i) Indicate whether the marginal social cost of converting land is greater than, less than, or equal to the marginal private cost of converting land.
= MBP
= MCP
Supply 1 = MCT = (MCS + MCP)
MCT > MCP
ii) Explain whether the private market quantity of land converted into residential development is socially optimal.
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
= MBP
= MCP
Supply 1 = MCT = (MCS + MCP)
Pso
Qso
Private QQe
Socially Optimal QQso
No, because MCT > MBP
Private Costs MCP fail to include all social costs
c) Assume that the conversion of open-space land and farmland imposes costs on the general population, which can no longer enjoy the scenic vistas.
ii) Explain whether the private market quantity of land converted into residential development is socially optimal.
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
= MBP
= MCP
Supply 1 = MCT = (MCS + MCP)
Pso
Qso
Private QQe
Socially Optimal QQso
Too much land is converted into residential development.
c) Assume that the conversion of open-space land and farmland imposes costs on the general population, which can no longer enjoy the scenic vistas.
ii) Explain whether the private market quantity of land converted into residential development is socially optimal.
Supply
Demand
QUANTITY OF LANDFOR RESIDENTIAL
DEVELOPMENT(ACRES)
Qe
Pe
PR
ICE
= MBP
= MCP
Supply 1 = MCT = (MCS + MCP)
Pso
Qso
Private QQe
Socially Optimal QQso
There is an overallocation of land to residential development.
