Question: A firm in industry A is making a location decision, and has narrowed the choice to two different locations, which we will call site 1 and site 2. The firm's revenue is independent of location and equals $5 million per year on each site. The firm's nonland production costs, however, differ at the two sites, being $4 million at site 1 and $4.5 million at site 2.
a. Assuming the land (rental) market is competitive, what is the firm's bid rent for each site?
b. Now suppose a firm in industry B is competing for sites with the industry A firm. The industry B firm would have profits before land rent of $750,000 at site 1 and $650,000 at site 2. How is the land allocated, and what is the equilibrium land rent we would observe at each site?