Low population density and large distance from civilization centers generate high costs of isolation. Immigration
reduces these costs for veteran residents but reduces social and cultural cohesion, increases the demand for scarce resources
and affects the rate of urban unemployment. An expected net benefit maximization model for determining the optimal
population size and the equilibrium urban-rural composition of an island similar to Australia is constructed. The
model is simulated for various agricultural water prices. The simulation results illustrate the central role of the effect of
immigration on urban unemployment rate in the determination of the island’s optimal population size.