Opportunity Cost and Economic Rent) Define economic rent. In the graph below, as
ID: 1244956 • Letter: O
Question
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 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? Does the amount of economic rent change?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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