Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 18, Problem 2TY
To determine
Calculate the economic rent for the machines.
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State whether the following is true or false
Pure economic rent occurs when the opportunity cost of a resource is zero and there is a positive price for that resources in the market
Distinguish between the following;
i. Direct demand and derived demand
ii. Economic rent and transfer earning
iii) Transfer payment and commercial rent
1. Suppose that a profit-maximizing firm, operating in a perfectly competitive market, uses the following production function:F(L,K) = L^1/2 + 2(K^1/2)
where L are the units of labor and K the units of capital. Suppose further that in order to operate, the firm must pay the government a fixed value patent of $ 50, no matter how much it decides to produce. Finally, consider that the factor price is given by w = 1 and r = 4, respectively.(a) Calculate the TMST, placing L on the x-axis. What value does the TMST take when L = 0, and what value does it take when K = 0? Explain if you can orthere are no corner solutions to the cost minimization problem.(b) Find the conditional demands L (q) and K (q), and the cost function C (q) in the long run.2. A company has a production function equal to f (L, K) = 2L + βK. Suppose that the firm currently achieves a level of production equal to q0, using for this a certain amount of capital and labor.(a) If the firm wanted to decrease the amount of…
Chapter 18 Solutions
Economics: Principles & Policy
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Similar questions
- Which of the following inputs do you think include relatively large economic rents in their earnings? a. Nuts and bolts b. Petroleum c. A champion racehorsearrow_forwardExplain the following statement: “Profits that more than cover the cost of capital are known as economic rents.”arrow_forward1&2 are separate questions. 1. The marginal revenue product of a factor shows how much an additional unit of a factor adds to - the level of production - dollar revenue. - profitability. - unit costs. 2. A profit‑maximizing firm operating in a perfectly competitive market will add new units of a factor of production until - marginal revenue product equals factor price. - marginal product equals factor price. - marginal revenue product equals marginal product. - marginal revenue product equals marginal revenue.arrow_forward
- Grace owns a house. She can rent her house for two years to one tenant for a profit of $24,000 a year, or she can rent it to two tenants each year for a profit of $10,000 per tenant per year. Calculate the economic rent over the course of two years of renting to one tenant.arrow_forwardRefer to Table below. Mr. AI-Maashani owns high end wedding cake baking business in Salalah. He leases/rents 4 high tech computer-controlled cake baking machines, for which he pays RO125 per day. He cannot increase the number of machines he leases/rents. He can hire as many workers as he wants at a cost of RO75 per day per worker. These are the only two inputs (cake baking machines and labour) he uses in his cake baking business. Use this information to fill in the columns in the above table. Number of workers Number of cakes per day Fixed cost Variable cost Total cost Average total cost Marginal cost 0 0 1 10 2 25 3 45 4 60 5 70arrow_forwardSusan Jones has a job as a pharmacist earning $45,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $55,000 per year or to purchase a pharmacy that generates revenue of $350,000 per year. To purchase the pharmacy, Susan would have to use her $20,000 savings and borrow another $90,000 at an interest rate of 8% per year. The pharmacy that Susan is contemplating purchasing has additional expenses of $100,000 for prescription and non-prescription drugs and lines of women’s and men’s personal hygiene products and cosmetics; $45,000 for one full time person; $20,000 for one part time person; $12,000 for rent; $2,500 for electricity; $1,300 for natural gas; $1,200 for telecommunications; and depreciation and amortization expenses are $5,500. Assume that income and business taxes are 35% and the repayment of the principal of the loan does not start before three years. Also assume that revenue is expected to grow at 5% per year and expenses at…arrow_forward
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