Question

You belong to a group of local entrepreneurs that owns a 10-acre blueberry farm. You could farm the land yourselves, or rent it out for $7,000 per year. Another option is to sell the land this year at its market price of $80,000. The price of the land next year will be $78,000. If you sell it, your group has an investment opportunity from which you expect to make a return of 6 percent per year.
What’s the total return from renting the land (i..e., the rental payment minus the economic depreciation) is __________?

a) $7,000. b) $5,000. c) $3,000. d) $1,000.

Answer 1

Answer:

b) $5,000

Explanation:

Provided that

Market price to sell the land this year = $80,000

The price of the land next year = $78,000

Renting it out will cost per year = $7,000

So, the economic depreciation would be

= Market price to sell the land this year - The price of the land next year

= $80,000 - $78,000

= $2,000

And, the total return would be

= Renting it out will cost per year - economic depreciation

= $7,000 - $2,000

= $5,000