How far should a firm hire an input, and how does economic rent differ from transfer earnings?
Hire until marginal revenue product equals factor price; rent is payment above the minimum needed to retain supply.
Follow the cause and effect
Calculate MRPL=MR×MPL or VMPL=P×MPL for a price taker.
Set MRPL=w in a competitive factor market.
Use area under supply for transfer earnings and the remainder as rent.
The model you are using
Conditions for this model
Fixed capital, competitive output price P=5, MPL=20−L over the relevant range, and a constant market wage.
The exam trap
MPL is physical output, not value, so multiply by MR or P before comparing with wage.
Connect the reasoning to the graph
What changes
- Labor demand is downward MRPL, intersecting supply to determine employment.
What stays fixed
Fixed capital, competitive output price P=5, MPL=20−L over the relevant range, and a constant market wage.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Use area under supply for transfer earnings and the remainder as rent.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Draw perfectly inelastic factor supply and explain why all payment is economic rent.