9.(Opportunity Cost and Economic Rent) Define economic rent. In the graph below,
ID: 1228973 • Letter: 9
Question
9.(Opportunity Cost and Economic Rent) Define economicrent. In the graph below, assume that the market
demand curve for labor is initially D1.
a. What are the equilibrium wage rate and employment
level? What is the 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 employment level? What happens to
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
the demand for labor? What are the new equilibrium
wage rate and employment level
Explanation / Answer
a)
Equilibrium wage rate is point b and employment level is point f.
Economic rent is the area bounded by points b, l and v.
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b)
If price of substitute increases, demand for labor increases and market demand curvewill shift up to D3. New equilibrium wage rate is point h and employment level is point g.Economic rent increases, and is now area bounded by points a, h and v.
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c)
If demand for final product drops, demand for labor would decrease and market demandcurve would shift down to D2. New equilibrium wage rate is point c and employmentlevel is point e. Economic rent decreases and is given by area bounded by point c, t and v
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