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Final_2009F_essayA

Final_2009F_essayA - THE UNIVERSITY OF HONG KONG School of...

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Section I: Short-answer questions (55 points in total). Answer all questions. Write your answers in the answer book. 1. (15 points) Once upon a time, a small country X sits next to a big country Y. Country X respects the market system and allows free flow of capital in and out of the country but not labor. For political reasons, country Y has remained a closed economy and does not allow any flow of capital and labor in and out of the country. There are two kinds of production activities in country X: farming and production of widgets. In country X, agricultural land yields 50 bushels of corn per acre each year. Corn sells for \$1/bushel, and a farmer can farm 400 acres with an equivalent amount of physical and psychological effort as is demanded by the factory job, which pays \$10,000/yr and is the only other job available. (a) (3 points) Tom was a factory worker before he turned himself into a farmer. He did so by renting 400 acres of land from a landlord. If labor and land are the only farm costs, how much will Tom earn in the long run and how much will each acre of land rent for? Explain. Answer: Due to competition, Tom will earn zero economic profit in the long run. Using this condition, we can compute the implied land rent per acre. Total revenue from farming = \$20,000/yr Total costs = \$10,000 + 400*(land rent per acre) Economic profit = 0 implies rent for 400 acres = \$10,000/yr implies rent = \$25 per acre. Tom will earn only \$10,000, what he can earn from the best alternative of factory job. (b) (3 points) Recently, knowing that organic vegetables might command a higher price, he turned to organic farming and has been able to double his revenue. How much will Tom earn in the long run and how much will each acre of land rent for? Explain.
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