1. Microeconomics
2006
Question 3

2. The supply and demand for land for residential develop-
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
for such development comes from privately held open-
space land or privately held farmland.

3. Redraw the graph above and show how an increase in
PRICE
Supply
Pe1 E2 Pe E1
Demand 1
Demand Qe
Qe1
QUANTITY OF LAND
FOR RESIDENTIAL
DEVELOPMENT
(ACRES)
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.

4. Supply 1
PRICE
Supply E2
Pe1 Pe E1
Demand
Qe1 Qe
QUANTITY OF LAND
FOR RESIDENTIAL
DEVELOPMENT
(ACRES)
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.
Note: If you assume the Subsidy was for “selling” land, then any decrease
Will shift Supply to the left.
Generally speaking: less subsidy shifts supply left
more subsidy shifts supply right

5. MCT > MCP Assume that the conversion of open-space land and
Supply 1
= MCT = (MCS + MCP)
PRICE
Supply
= MCP Pe
Demand
= MBP Qe
QUANTITY OF LAND
FOR RESIDENTIAL
DEVELOPMENT
(ACRES)
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.
MCT > MCP

6. Supply 1
= MCT = (MCS + MCP)
PRICE
Supply
= MCP
Pso Pe
Demand
= MBP
Qso Qe
QUANTITY OF LAND
FOR RESIDENTIAL
DEVELOPMENT
(ACRES)
Socially Optimal Q
Qso
Private Q Qe
ii) Explain whether the private market quantity of land converted into
residential development is socially optimal.
No, because MCT > MBP
Private Costs MCP fail to include all social costs

7. Assume that the conversion of open-space land and
Supply 1
= MCT = (MCS + MCP)
PRICE
Supply
= MCP
Pso Pe
Demand
= MBP
Qso Qe
QUANTITY OF LAND
FOR RESIDENTIAL
DEVELOPMENT
(ACRES)
Socially Optimal Q
Qso
Private Q Qe
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.
Too much land is converted into residential development.

8. Assume that the conversion of open-space land and
Supply 1
= MCT = (MCS + MCP)
PRICE
Supply
= MCP
Pso Pe
Demand
= MBP
Qso Qe
QUANTITY OF LAND
FOR RESIDENTIAL
DEVELOPMENT
(ACRES)
Socially Optimal Q
Qso
Private Q Qe
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.
There is an overallocation of land to residential development.