Intro to microeconomics Winter 2014 1 Definition of rent A payment in excess of what is necessary to call forth production of some good or service The excess payment that you get between the wages here and what you could earn elsewhere 2 Difference between profit something you earn and rent why is it that rent occurs has the same reason as increasing marginal cost at the extensive margin In a intensive margin it s within the firm they are adding people to the FIXED amount labor machinery so there would be a congestion effect which would results in diminishing marginal returns 3 Dissipation of rents Does it occur only in the common property It occurs in common property People don t own the land so they can t exclude others out of the labor production market People care about their self interest They will continue to work in the place rather than else where as long as the VAPL is greater than the wage It ignores the negative impact on the cost of adding additional worker Simply put Workers ignore the impact they have on other workers The negative impact would be SLOWING DOWN the production line Explain This is the maximum rent that could have been earned by choosing workers where VMPL W That is in the system of common property dissipation of rents takes place The rent represents the net gain in the value of output requiring use of scarce resources in an activity over and above the same resources used elsewhere in the economy This net gain is dissipated by the absence of property rights Slows down the cost The MPL differs from the APL because MPL takes into account the impact of adding another worker on previous workers average product If this impact is ignored then individuals do not own the full consequences of their actions this is the source of lost gains from trade 4 Use property rights in applications Summary notes Feb 25th 1 6 3 25 2 14 6 47 5 42 4 35 7 or more workers 49 Example Why is common property production inefficient But private property production more efficient Private property rents are maximized they care for the margin production Suppose the output of oysters per hour from a public oyster bed is given by the following production function where L represents the labor input and Q represents total product or output in oysters L Q Assume the oysters sell for 1 each and this price is unaffected by total output on this land Assume all the oyster gatherers can earn 7 per hour in their next best alternative a Suppose the oyster bed is common property i e no one owns it and anyone who wishes can collect oysters and share equally in the output Explain why common property leads to an oyster harvest that is too large i e an inefficient level of production How many people will farm in this case Self interest ignores the impact on other workers resources would be depleted b Suppose the oyster bed is privately held How many workers would the owner hire and would it be an efficient allocation of resources c What additional effect does common property have on efficient production of oysters over time that is on into the extended future And why What are some circumstances that imply price support Is encouraging imports one of them Also if a country banned exports imports what s the effect on the market of the domestic market and the foreign market 7 P 145 check your understanding P 252 equating at the margin P 245 Open fishing example salmon Why is that salmon is argued and feared to be on the brink of extinction but not beef or chicken 8 How to calculate the net gains in the labor market 9 Reading 14 10 Comparative advantage P 197 How to understand the relationships between reducing tariff and comparative advantage It s a international trade problem Country that has the lower MC would have a comparative advantage in producing that good therefore they become the exporter Reducing tariff can expands the international market 11 Calculate costs from the stairway graph how to explain numerically the supply curve of a firm is actually the marginal cost of the firm 12 Why is that as marginal costs are the same the output is being produced at the minimum possible cost 14 Antipollution affects How does it reduce labor inputs Does it refer to the labors producing coal Minimize costs solution p205 15 Economic pie ECONOMIC GROWTH 16 The role of specialization how does it facilitate the invention of machines 19 Is it what workers can earn or what they can produce elsewhere that is important to understand common property 20 Overgrazing and fencing effect how does it relates to property rights Navajo culture Why is the population problem a common property problem 22 Why do rents produce by a competitive firm represent in terms of alternative value of the resources the firm uses 23Marginal product analysis in applications 27 Do u have to use numbers to explain the more inelastic side pays most of the taxes 28 Minimum Wage price floor Why is it that teenagers would be most affected by the law 3 9 2 7 1 5 5 13 4 11 29 An economy produces two goods X and Y The production of a good X has the following Q MC Price of a unit of X is 11 a Write down how many units will be supplied What are the rents here b What is the reason for the rising MC of good X c If government taxes this good at 1 per unit and collects if from the seller given a downward sloping demand will the seller pay all the tax Explain 30 31 P 238 32 P 255 12 14 33 In a grocery store an accountant finds that profits per square foot of Corn Flakes on shelves are higher than profits per square foot of Cheerios Should the store not carry any cheerios For allocating goods problem people won t be using up all the space for all goods due to diminishing marginal returns So they would use the space to allocate these two different goods to maximize the marginal profit by equalizing them at the margin