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Consider a simple economy that has a fixed amount of land, and where the only use of land is for housing. It is assumed that housing units can be produced at constant marginal cost, and that these units can be sacked. A given parcel could therefore support all the units of housing demanded in the community. Assume there are 10 parcels of land, each owned by a different individual.
(a) What is the marginal productivity of land in the production of housing? Assuming there is competition in the supply of housing, what is the competitive rental payment to land?
(b) In the case of several owners and competition in the supply of housing units, would a parcel of land sell for positive price?
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