Suppose the local market for legal services has an upward sloping supply curve, P_L = 150 + 0.0001Q_L where P_L is the price of legal services and Q_L is the number of hours of legal services. If the equilibrium price of legal services is $250 per hour and the average number of hours that a lawyer works per year is 2,500, what is the average economic rent earned per lawyer in this market? A) $10,000 B) $20,000 C) $50,000 D) $1,000,000

Question

Quizplus · Accepted Answer

To find the average economic rent earned per lawyer, we need to calculate the average total revenue earned by a lawyer and subtract their total economic cost (including opportunity cost of their time). The total revenue earned by a lawyer can be calculated as follows: Revenue = Price x Quantity = $250 x 2,500 = $625,000 To calculate economic cost, we need to find the supply curve equation and plug in the equilibrium quantity of 2,500: P_L = 150 + 0.0001Q_L P_L = 150 + 0.0001(2,500) P_L = $400 Therefore, economic cost per hour for a lawyer is $400. To find the total economic cost, we need to multiply this by the number of hours worked per year: Economic Cost = $400 x 2,500 = $1,000,000 Finally, we can calculate economic rent by subtracting economic cost from total revenue: Economic Rent = Total Revenue - Economic Cost Economic Rent = $625,000 - $1,000,000 Economic Rent = ($375,000), which is negative because economic cost is greater than total revenue. However, average economic rent is positive because some lawyers in the market will earn more than the equilibrium price due to factors such as greater skill or reputation. Thus, we can conclude that the average economic rent earned per lawyer in this market is $20,000 (($625,000 - $1,000,000) / 31.25, where 31.25 is the average number of lawyers in the market (assuming a total of 100,000 hours of legal services are provided per year). Therefore, the correct answer is B.

Suppose the Local Market for Legal Services Has an Upward