# Microeconomics 2006 Question 3.

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Microeconomics 2006 Question 3

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.

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.

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

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

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

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.

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.