In 1917, Mahatma Gandhi settled a dispute between Indian farmers and British landowners. Under a share-cropping arrangement, each indigo farmer gave 15 percent of the harvest to the landowner. When landowners heard about the development of synthetic indigo, they quickly sold the land to the farmers, who at the time didn't know about synthetic indigo and the upcom­ing collapse of indigo prices. When the price of indigo dropped, the farmers who had purchased land demanded their money back. Gandhi negotiated a partial refund of the payments. Imagine that you are Gandhi's research as­sistant and must compute the appropriate refund for the typical new landowner.

• The initial price of indigo is $10. The annual output is 100 units per hectare.

• To purchase land, farmers borrow money at an interest rate of 10 percent per year.

• The alternative crop is rice, which has a price of $8, an annual output of 100 units, and a nonland cost (including the opportunity cost of the farmer) of $700.

a. Under the original share-cropping arrangement, the effective annual rent on land is per hectare, computed as . . . This implies that the nonland cost per hectare is , computed as . . . .

b. Before farmers find out about synthetic indigo (while they are assuming that the price will be $10), the anticipated annual profit from indigo is per hectare, computed as . . . A farmer's willingness to pay for a hectare of land is , computed as . . . .

c. Suppose that the development of synthetic indigo decreases the price of in­digo to $5. The new annual profit from a hectare of land is , computed as . . . .

d. A farmer's willingness to pay is per hectare. The appropriate refund, to be paid by the old landowners to the new landowners, is , computed as . . . .