Consider the problem of manufacturing generic drugs in India. They can sell as much as they want at the market price. Suppose also that all industrial businesses have constant returns to scale in production: if a factory wants to double the size of its operations, it merely doubles the size of its factory, hires twice as many workers (at the market wage) and uses twice as many machines (at a price which does not change).

a) Show that, at any given location, the market price of an industrial property would be a linear function of the size of the property. (Hint: start with a "standard" property size (e.g., 1 ha) and consider the effects of changing it.)

b) Transportation costs are a serious issue in India. If the government improved transportation infrastructure which reduced transportation costs by half, the price of land would increase. Suppose that the primary market for drugs is overseas and that distance to a harbour is the dominant measure of location. Would improved transportation have a bigger effect on the

price of land used by industry near the harbour or far away?