The Bid-Rent Function - Pomona

The Bid-Rent Function Outline Leftover Principle Von Thunens Model Comparative Statics Ricardo Fixed prices Zero economic profit Fertility of land varies

Land to highest bidder Zero Transport Costs Leftover Principle =P QC(fi )R =0 R =P QC( fi ) wherei fis fertility of the acre of land; C is production cost; P is price;Q is output;R is rent. Von Thunen

Fixed prices Central market place Competitive markets Production costs same at all location All farmers use 1 acre of land Land Rent and Accessibility =PQCtQuR=0 R=P QC tQu where t is unit transport ucost; is distance; C is production cost; P is price;Q is output;R is rent.

Flexible Farmer For each distance, firm chooses acreage and nonland inputs to minimize costs of producing Q. As rents increase, firm will use less land and more land inputs. Bid rent function will be steeper close to city. Flexible firm will have lower costs than inflexible firm Decrease in transport costs will make bid-rent less steep if output prices unchanged. If output prices affected, bid-rent will be lower. Bid Rent for Flexible Farmer BID-RENT for Flexible Farmer $500 $450

$400 $350 $300 $250 $200 $150 $100 $50 $0 0 0.5 1 1.5

2 Distance to Market 2.5 3 3.5 Increase in Transport Costs Effect of Increase in Transport Costs on Bid-Rent 500 400

300 Original Rent 200 New Rent 100 0 0 0.5 1

1.5 2 -100 Distance from market 2.5 3 3.5 Increase In Price of Output 1800

1600 1400 1200 1000 Original Rent New Rent 800 600 400 200 0 0 0.5

1 1.5 2 Distance from market 2.5 3 3.5