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Is this an equilibrium? If so, is it stable? Are the cities at their socially optimal size?<br />
It is an equilibrium but is not stable. The cities are not at their optimal size.<br />
Is this an equilibrium? If so, is it stable? Are the cities at their socially optimal size?<br />
Economics 312 Urban Land Economics<br />
VERSION 2<br />
SOLUTIONS<br />
Midterm Exam #2<br />
Section 1: Multiple Choice (3 points each)<br />
Select the most appropriate answer, and carefully bubble in the letter of the answer on your NCS<br />
marking card.<br />
Questions 1-4 refer to the following setup and diagram.<br />
Consider a farmer choosing between three pieces of land, each of different fertility. The world<br />
price of grain is $10 a bushel and is expected to remain fixed. Each diagram shows the cost<br />
curves associated with annual production on the land. Average production cost (non-rent costs<br />
per unit) at the profit maximizing quantity is denoted in each diagram. Assume all farmers have<br />
the same productivity on a given piece of land and assume free entry and a competitive market<br />
for land.<br />
1) Which parcel—after rent is paid—will yield the highest profits for the farmer?<br />
A) All will yield the same profits.<br />
B) All will yield negative profits and so won’t be farmed.<br />
C) Parcel I.<br />
D) Parcel II.<br />
1<br />
E) Parcel III.<br />
2) Given the annual rent earned by Parcel II in equilibrium, what would we expect Parcel II to<br />
sell for? Assume the annual interest rate is 5%<br />
A) $800,000<br />
B) $1,440,000<br />
C) $8,000<br />
D) $160,000<br />
E) None of the above.<br />
3) The pre-rent profit associated with the least fertile parcel of land is
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