FIGURE 13- 3 The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

-Refer to Figure 13- 3.This factor market is initially in equilibrium at point B.Assume that there is a decrease in the demand for widgets and a new equilibrium is established at point A.Which of the following statements about point A is true?
A)Transfer earnings for the 20th unit of the factor are $6 and economic rent of the 20th unit of the factor is $2.
B)The marginal revenue product of the 20th unit of the factor is $120 and economic rent of the 20th unit of the factor is $6.
C)Total economic rent is $120.
D)Total transfer earnings are $120.
E)The marginal revenue product of the 20th unit of the factor is $6 and economic rent of the 20th unit of the factor is $0.

Question

FIGURE 13- 3 The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.
 
-Refer to Figure 13- 3.This factor market is initially in equilibrium at point B.Assume that there is a decrease in the demand for widgets and a new equilibrium is established at point A.Which of the following statements about point A is true?
A)Transfer earnings for the 20th unit of the factor are $6 and economic rent of the 20th unit of the factor is $2. 
B)The marginal revenue product of the 20th unit of the factor is $120 and economic rent of the 20th unit of the factor is $6. 
C)Total economic rent is $120. 
D)Total transfer earnings are $120. 
E)The marginal revenue product of the 20th unit of the factor is $6 and economic rent of the 20th unit of the factor is $0.

Quizplus · Accepted Answer

At point A, the equilibrium price of the factor has decreased from $6 to $4. The marginal revenue product of the 20th unit of the factor is equal to the new equilibrium price of $4, so it is $4. Economic rent is equal to the difference between the marginal revenue product and the factor's price, so the economic rent of the 20th unit of the factor is $0 ($4 - $4). Therefore, choice E is correct. Choices A, B, C, and D are incorrect because they involve values that are not consistent with the new equilibrium at point A.

FIGURE 13- 3 the Demand and Supply Curves Shown Below