von Thnen rent theory and agricultural subsidies. (10 points)

Background informationThe United States has a long history of providing generous support for the agricultural sector. In the 2002 and 2008 Farm Bills, commodity program payments intended to provide eligible farmers with income support and address price and revenue risks were estimated to be about $9.14 billion. Farmland renting is a common practice in the U.S., with about 40% of the farmland in operation rented from others. Farmland rental rates, land values, and land-use decisions are influenced by these farm programs. The public is concerned that programs aimed at helping poor farmers may actually benefit relatively wealthy non-agricultural landowners. Given this background, literature examining the impacts of government subsidies on farmland rental rates has recently begun to emerge. For example, how much of each dollar of subsidy is captured by landlords through raising the rent.

a. If the government's goal is to help farmers (increasing farmers' income and reducing agricultural risks), do you think that direct payment of subsidies to farmers is an effective method? Explain why using the von Thnen rent theory. How about using the Ricardian rent theory? Will it change your conclusion? Explain why.

Next, we will design an empirical analysis trying to answer the question raised in the background introduction. Suppose we have the following one-year cross-sectional data from the United States:

• Farm-level cash rental rates (US$)
• Farm-level agricultural subsidy payments (US$)

The dataset has two types of subsidy payments: fixed direct payments (FDP) and disaster relief payments (DRP). The former provides direct per-acre payments that are independent of market conditions. The latter provides per acre payments in the event of a significant loss due to adverse weather (such as drought, flood). Assume that in this data set, all farmers are tenant farmers, and they rent farmland from landowners by a cash lease.

b. Suppose we want to use the OLS technique and estimate the following model