Econ 4th Edition by William McEachern

Exercise 6

(Opportunity Cost and Economic Rent) Define economic rent. In the graph below, assume that the market demand curve for labor is initially D 1.
a. What are the equilibrium wage rate and employment level? What is the economic rent? What is the opportunity cost?
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? What is the opportunity cost?
c. Suppose instead that demand for the final product drops, other things constant. Using labor demand curve D 1 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? Does opportunity cost change?