Question

Suppose a country called Flat Land managed to drain and reclaim land from the sea, thereby...

Suppose a country called Flat Land managed to drain and reclaim land from the sea, thereby increasing the total amount of land with 10%.

(a) Discuss how this would affect the market for land? How would this affect the landowners: would the rental rate of land go up or down? Discuss and illustrate graphically.

(b) How would this event affect the labor market in Flat Land? Discuss and illustrate graphically.

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Answer #1

a) increase in land by 10% increases the supply of land in the market. This shifts S rightwards to S'. Since there is no change in demand for land rental price for land falls and new equilibrium is attained at e2. Thus 10% increase in land results in larger land in the market at lower rental price. This hurts landowners because now they get lower rent on their lands.

b) increase in land increases labour productivity which further leads to increase in demand for labor. This shifts D rightwards to D' in labor market. Since there is no change in supply of labour wage rate increases to w2 and new equilibrium is attained at e2. At this point number of workers employed is higher and wages rate is also higher.

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