Suppose the supply and demand of land for natural gas extraction are imperfectly elastic. Given that coal is a potential substitute for natural gas in energy applications, a change in the price of coal may shift the demand curve for natural gas. What happens to the economic rents assigned to land on which natural gas is extracted if the price of coal declines?
A) Rents increase.
B) Rents are positive and remain unchanged.
C) Rents decrease.
D) Rents are zero before and after the change.

Question

Quizplus · Accepted Answer

If the price of coal declines, it becomes more attractive for energy applications than natural gas, causing a decrease in the demand for natural gas. This, in turn, lowers the economic rents assigned to land on which natural gas is extracted. Therefore, choice C is the correct answer.

Suppose the Supply and Demand of Land for Natural Gas