Q2: In this question, we will try to understand alternative land uses as per the Von-Thunen model as discussed in class. The alternative uses are given in the table below: Revenue Nonland Production Cost Milk $1000 $200 Transport Cost $80/mile $30/mile $10/mile Wheat $800 $200 Potato $600 $200 (a): What is the pre-rent profit curve? Explain the economic intuition behind using the pre-rent profits to determine land-use. [2 points) (b): Use pre-rent profits to determine the zones where each crop is cultivated. In particular tell us within how many miles of the center is milk produced. From which mile to which mile are wheat and potato cultivated respectively. Show your calculations clearly and also draw and label the diagram. [9 points) 1 (c): Consider the role of technological innovation. Volvo discovers a new way of transporting milk that reduced its transport cost to $ 35 per mile. What would have to production patterns as a result? In particular, how much wheat is produced? Show your calculations clearly and also draw and label the diagram [9 points) (d): The answer to wheat production in part (c) is a partial equilibrium answer. What will happen in general equilibrium? Hint: Is the demand for wheat higher or lower than the supply. How does this impact price and therefore the pre-rent profits for wheat. [5 points) Q2: In this question, we will try to understand alternative land uses as per the Von-Thunen model as discussed in class. The alternative uses are given in the table below: Revenue Nonland Production Cost Milk $1000 $200 Transport Cost $80/mile $30/mile $10/mile Wheat $800 $200 Potato $600 $200 (a): What is the pre-rent profit curve? Explain the economic intuition behind using the pre-rent profits to determine land-use. [2 points) (b): Use pre-rent profits to determine the zones where each crop is cultivated. In particular tell us within how many miles of the center is milk produced. From which mile to which mile are wheat and potato cultivated respectively. Show your calculations clearly and also draw and label the diagram. [9 points) 1 (c): Consider the role of technological innovation. Volvo discovers a new way of transporting milk that reduced its transport cost to $ 35 per mile. What would have to production patterns as a result? In particular, how much wheat is produced? Show your calculations clearly and also draw and label the diagram [9 points) (d): The answer to wheat production in part (c) is a partial equilibrium answer. What will happen in general equilibrium? Hint: Is the demand for wheat higher or lower than the supply. How does this impact price and therefore the pre-rent profits for wheat. [5 points)
