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 in equilibrium at point B.If a technological change occurs in the production of widgets that allows for increased production from each factor,then
A)total factor earnings will rise and economic rent to the 40th unit will be zero.
B)total factor earnings will decrease and economic rent to the initial 40 units will increase.
C)equilibrium will move toward point D and the factor price will rise.
D)equilibrium will move toward point C and economic rent to the initial 40 units will increase.
E)economic rents to the initial 40 units of the factor will decrease.

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 in equilibrium at point B.If a technological change occurs in the production of widgets that allows for increased production from each factor,then
A)total factor earnings will rise and economic rent to the 40th unit will be zero. 
B)total factor earnings will decrease and economic rent to the initial 40 units will increase. 
C)equilibrium will move toward point D and the factor price will rise. 
D)equilibrium will move toward point C and economic rent to the initial 40 units will increase. 
E)economic rents to the initial 40 units of the factor will decrease.

Quizplus · Accepted Answer

If a technological change occurs that allows for increased production from each factor, the supply curve will shift to the right, from S1 to S2. As a result, the equilibrium point will move from point B toward point C. This will lead to an increase in the quantity of the factor employed (from Q1 to Q2) and a decrease in the factor price (from P1 to P2).

However, the decrease in factor price will not be uniform for all units of the factor. Initially, the increase in productivity will lead to an increase in total factor earnings and economic rent to the initial 40 units of the factor. But as the supply curve shifts further to the right, the increase in the quantity of the factor employed will eventually lead to a decrease in economic rents to the initial 40 units.

Therefore, the correct answer is D: equilibrium will move toward point C and economic rent to the initial 40 units will increase.

FIGURE 13- 3 the Demand and Supply Curves Shown Below