Check Your Understanding

1. Question

   Explain how each of the following events would affect the equilibrium rental rate and the equilibrium quantity in the land market.

   1. Developers improve the process of filling in coastal waters with rocks and soil to form large new areas of land.

      This would increase the supply of land, shifting the supply curve to the right and leading to a new equilibrium at a lower rental rate and a higher quantity.

   2. New fertilizers improve the productivity of each acre of farmland.

      This would increase the marginal product of land and thus the value of the marginal product of land. The MRP curve for land would shift to the right, leading to a new equilibrium at a higher rental rate and a higher quantity.

2. Question

   Explain the following statement: “When firms in different industries all compete for the same land, the marginal revenue product of the last unit of land rented will be equal across all firms, regardless of whether they are in different industries.”

   When firms from different industries compete for the same land, an interindustry land market develops and, other things being equal, each unit of land used by the various industries will rent for the same equilibrium rental rate, R. According to the marginal productivity theory of income distribution, MRP for land = R for the last unit of land rented. Because each industry rents until MRP for land = R , the last unit of land rented in each of these different industries will have the same marginal revenue product of land.