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ule_mt2_v1_soln

# At k when the policy change is implemented

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Unformatted text preview: he pre- rent profitability of agricultural land. This means that farmers’ willingness to pay will go up. This means that farmers will outbid residential users at the fringe of the city. 8 b) 3 points Using a diagram that shows just a residential bid- rent function and an agricultural bid- rent function, clearly illustrate how a federal gas tax would lead to more compact cities. Assume the gas tax is not refunded to local residents. The gas tax increases commuting costs which makes the residential BR function steeper. Note that because the gas tax is not refunded lump- sum to residents, willingness to pay at the center of the city does not change compared to what it was before the tax. Willingness to pay for land further away from the center falls, however, due to the higher commuting costs. If the tax were refunded then the increased income of people (from the refund) would have shifted the whole curve up (while also making it steeper). 9 3) (3 points) Suppose that the federal government announces a policy that it will tax the owner of every parcel of land in Victoria \$100 a year (regardless of size or value) once a year every year into the infinite future, starting today. Assume the federal government does nothing useful to Victoria landowners with this money (assume the feds hold a big bonfire and burn the money). How much will each parcel of land in Victoria change in value assuming an interest rate of 10%, fixed into the infinite future? Assume that people are not permitted to combine parcels to avoid the tax. You must show your work to receive credit. This will reduce the value of each parcel of land by \$100/0.1 or \$1000. End Section 3 End of Exam 10...
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