5. A piece of land has a market value of $2000 per acre, if used for agricultura

Question

5. A piece of land has a market value of $2000 per acre, if used for agricultural purposes. A land ‘speculator’ buys the land, paying $3000 an acre. Five years later she sells it to a house builder for $7,000 an acre. The builder builds a house for $50,000 and sells it (and the land on which it sits) to a homeowner 2 yrs later for $68,000. Assuming the land market and housing market are both competitive and that there was no inflation, what is the total land rent in houses and how was that rent distributed among farmer, speculator, builder and homeowner? (20 points)

Explanation / Answer

Total land rent is $18,000.

This is equal to $68,000 (benefits) minus $50,000 (costs)

$68000-$50000=$18000

$3,000 goes to the farmer. ($3000 benefits minus $0 costs)

$3000-$0=$3000

$4,000 goes to the speculator. ($7,000 benefits minus $3,000 costs)

$7000-$3000=$4000

$11,000 goes to the builder. ($68,000 benefits minus $57,000 (building+developer costs) $18000

$68000-$57000=$11000

Since the homeowner has not sold it yet we don’t know what land rent is until he/she sells.

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