Economics Study Set 17
Quiz 19 :
Pricing the Factors of Production
A firm continues to expand its output by using more inputs up to the level where its marginal cost equals marginal revenue. A profit-maximizing firm often tries to increase its output for obtaining the larger market share. A market share can be obtained by increasing the larger amount of production. If a firm quits buying of inputs when the marginal revenue product of inputs is greater than price, then it would not be able obtain the market share. Most of the large firms buy inputs without considering their marginal revenue product. A profit-maximizing firm focuses on maximizing its profit, not maximizing the marginal revenue product. Thus, a profit-maximizing firm increases its purchase of factors of production up to the level where marginal revenue product equals the price.
(a) Relatively large economic rent is obtained if the demand is higher for those inputs. The demand for nuts and bolts is relatively less because manufactures can easily produce them. If the supply is higher than the demand, then economic rent cannot be earned. Therefore, one would think that the nuts and bolts are not beneficial to earn economic rent. (b) The demand for petroleum is relatively higher in the market. The supply curve of petroleum is also positively sloped. Thus, the owner of petroleum can earn economic rent. Higher market demand leads to a higher economic rent. (c) The demand for a champion racehorse is relatively higher compare to its supply. The supply of a champion racehorse is inelastic. People would be ready to purchase a champion racehorse at any prices. Thus, a champion racehorse includes a large economic rent.
If the interest rate is higher in the market, then one would have earned more money. But as determined in the contract, one will be paid $10,000 after two years. If rate of interest is lower, then would lose relatively less. Lower interest rate also indicates higher value of currency. If the value of money does not decrease after two years, then one would become relatively rich. Reduction in the interest rate shows a relative increase in the value of money. Therefore, considering the impacts of a fall in interest rate, one would become richer.