1. Distinguish between how the market reacts to a temporary difference in prices
ID: 1095403 • Letter: 1
Question
1.Distinguish between how the market reacts to a temporary difference in prices for the same resource and how the market reacts to a permanent differene for similar resources.
1.Distinguish between how the market reacts to a temporary difference in prices for the same resource and how the market reacts to a permanent differene for similar resources. 2. Define economic rent. In the graph below. Also answer the other questions below it please.a. What are the equilibrium wage rate and employment level? What is the economic rent? What is the opportunity cost? b. Next, assume that the price of substitute resource increases other things constant. What happens to demand for labor? What are the new equilibrium wage rate and employment level? What happens to economic rent? what is the opportunity cost? c. Suppose instead that demand for the final product drops, other things constant. Using labor demand curve D1 as your starting point, what happens to the demands of labor? What are the new equilibrium wage rate and employment level? Does the amount of economic rent change? Does opportunity cost change?Explanation / Answer
Distinguish between how the market reacts to a temporary difference in prices for the same resource and how the market reacts to a permanent difference. Why do the reactions differ?
Answer
Temporary Differences in the Resource Prices
Resource prices are sometimes very temporarily across the markets as adjustment takes lot of time.
However if the resource markets are free for adjusting, price differences may trigger reallocation of the resources that equalizes the payments for same resources.
Temporary price differences may spark movement of the resources away from the less paid uses to the higher-paid uses
Permanent Differences in Resource Prices
Not all the resource & the price differences may cause the reallocation of the resources.
For instance land can lead to the permanent differences in the prices.
Some wage differentials stem from different costs of the acquiring education & also the training needed to perform the specific tasks.
Another earning differential also reflect the differences in a non-monetary aspects of the same jobs.
Permanent price differences may also the cause not these reallocations.
8. Opportunity Cost and Economic Rent) Define economic rent. In the graph below, assume that the market demand curve for labor is initially D1.
a. What are the equilibrium wage rate and level of employment? What is the amount of economic rent?
b. Next assume that the price of a substitute resource increases, other things constant. What happens to demand for labor? What are the new equilibrium wage rate and level of employment? What happens to the amount of economic rent?
c. Suppose instead that demand for the final product drops, other things constant. Using labor
demand curve D1 as your starting point, what happens to demand for labor? What are the new equilibrium wage rate and level of employment? Does the amount of economic rent change?
SOLUTION:
Economic Rent:
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