Suppose that a violent earthquake causes the uninhabited Hawaiian island of Mokuauia (also called Goat Island) to fall into the Pacific Ocean. No people are killed or injured, and since the island is undeveloped, no buildings are destroyed. The island was a source of tourist income for Hawaiian landowners. Which of the following statements correctly describes the rents earned by the people who own land on the surrounding islands?
A)As the supply of vacation land decreases, the marginal productivity of the remaining land will decrease; thus rents will decrease.
B)As the supply of vacation land decreases, the marginal productivity of the remaining land will increase; thus, rents will decrease.
C)As the supply of vacation land decreases, the marginal productivity of the remaining land will increase; thus, rents will increase.
D)There would be no change in the rents earned by the other landowners because the effects of supply and demand would exactly cancel each other out.

Question

Quizplus · Accepted Answer

With the decrease in available vacation land due to the loss of Mokuauia, the remaining land becomes more valuable as it is now scarcer relative to demand. This increased marginal productivity typically leads to higher rents.

Suppose That a Violent Earthquake Causes the Uninhabited Hawaiian Island