1. Allocating Land in Desirable Communities
Consider a developer that has vacant land (90,000 squarefeet of space) ready for building houses in a neighborhood that is desirable because of its superior schools. There aretwo types of households: lower-income (L) and higher-income (H). Each L is willing to pay $100,000 to live in theneighborhood, and each H is willing to pay $400,000. The preferred lot size is 1,500 square feet for type L, and 10,000square feet for type H.
a. If there are no restrictions on lot sizes, to which type of household will the developer want to sell the vacant land?Explain why.
b. Suppose the neighborhood is considering whether to set a minimum lot size with the goal of excluding the lower-income households. What is the threshold minimum lot such that selling the land to the either of the two types of households would generate the same amount of revenue for the developer? Show your work and explain.
[Hint: Setting a minimum lot size doesn't change the willingness to pay of either type of household to live in the neighborhood. Rather, it would change how much land the developer would be required to sell to each of thelower-income households.]