The diagram above shows 3 parcels of farmland lying on the n

The diagram above shows 3 parcels of farmland lying on the north bank of the great grey-green, greasy Limpopo River, all set about with fever-trees. The names on the parcels are those of the landowners. Below the diagram are those of the farmers who rent the parcels in the first year. Assume that each farmer uses $45,000 of capital (farm equipment); we\'ll ignore labor, fertilizers, and depreciation on equipment. Assume also that the typical, readily available, rate of return on capital investment in this market is 8% per year

igure nders Bachmann Cormack $3,600 $6,300 $4,950 Farmers erxes erglin abrowski The diagram above shows 3 parcels of farmland lying on the north bank of the great grey-green, greasy Limpopo River, all set about with fever-trees. The names on the parcels are those of the landowners. Below the diagram are those of the farmers who rent the parcels in the first year. Assume that each farmer uses $45,000 of capital (farm equipment); we\'ll ignore labor, fertilizers, and depreciation on equipment. Assume also that the typical, readily available, rate of return on capital investment in this market is 8% per year Gross Income % rate of return In the first year the landlords charge no rent, i.e., rents - $0. How much gross income, and what percent rate of return on investment, will each farmer earn? Farmer Xerxes Yerglin Zabrowski 1. 2. Will any of the farmers have an incentive to bid a nonzero rent under these circumstances? Explain briefly 3. In the second year, farmers engage in competitive bidding. How much rent will each landlord receive? How much gross income, and what percent rate of return on investment will each farmer earn? Gross Income % rate of return Landlord Anders Bachmann Cormack Farmer Xerxes Yerglin Zabrowski Rent 4. Say now the price of hay (grass being the crop grown along the banks of the river) rises sharply What effect will this have on landlords\' rents? On farmers\' rates of return? Explain briefly

Solution

1) Farmer Gross Income % rate of return

Xerves 3600.00 8.00%

Yerglin 6300.00 14.00%

Zabrowski 4950.00 11.00%

2) Since the farmers Yerglin and Zabrowski receives rate of return gretaer than the available 8%, there is a chance that they can bid aggressively for the land and provide non-zero rent

3) Landlord Rent Farmer Gross Income % rate of return

Anders 0.00 Xerves 3600.00 8.00%

Bachmann 2700.00 Yerglin 3600.00 8.00%

Cormack 1350.00 Zabrowski 3600.00 8.00%

The landlords can receive rentals till the rate of return equals 8% of the capital investment of $45,000

4) \"Due to increase in price of hay, the rental income for the landlord is likely to increase as farmers would bid competitively to get a chance to sow on this land.

The rate of return for the farmers may also increase but likely to limit to 8% because of competitive pressures\"