Mr. Greengene grows corn on the land he rents from Lauren, initially at a price of $500 per hectare. Suppose Mr. Greengene develops a new method for growing corn that decreases the growing cost by $300 per hectare. Lauren rejoices, citing the leftover principle as she counts on collecting $800 in rent instead of $500.

a. Greengene's rent will increase by $300 per hectare if:

b. Greengene's rent will be unchanged if:

a) the cost of production of Greengene's falls by $300 or more

b) there is no change in the cost of production

Explanation:

a)   The leftover principle states that land rent equals the excess of total revenue over nonland costs. Mr. Greengene initial rent is already fixed at $500. The new method of growing cost of corn is now $300 per hectare. Lauren will continue to apply the leftover principle when collecting rent as long as the cost of production of Greengene's falls by $300 or more.

b) If Lauren decides to increase the rent to $800 when there is no change in the cost of production, she stands to lose Mr. Greengene as he will simply look for another land to rent from someone else. Therefore, Greengene's rent will be unchanged if there is no change in the cost of production.

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