Question

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000 a year. The firms that employ designers of normal ability each collect $500,000 in revenue a year, which is just enough to ensure that each earns exactly a normal profit. However, the 200th company employs Janus Jacobs, an unusually talented designer. Because of Jacobs's talent, this company collects $700,000 in revenue a year.

a. How much will Jacobs earn?

Instruction: Enter your response as an integer value.

$  per year.

What proportion of his annual salary will be economic rent?

Instruction: Enter your response as a percentage rounded to the nearest whole number.

%.

b. Will the advertising company for which Jacobs works be able to earn an economic profit?

	Yes.
	No.

Answer 1

Solution a:

Ordinary designers get a salary of $100,000.

Firms earn revenue of $500,000 without hiring Jacobs.

Firms earn revenue of $700,000 with hiring Jacobs.

This company should pay Jacobs the extra revenue that the firms could earn after hiring Jacobs plus the normal salary for a designer.

Extra revenue that firms earn = $700,000 - $500,000 = $200,000

Therefore, Jacobs earn = $200,000 + $100,000 = $300,000 per year

Salary that the firms pay Jacobs = $300,000

Jacobs’s reservation price = $100,000

Economic rent = $300,000 - $100,000 = $200,000

% of salary that will be considered as economic rent = $200,000 / $300,000 = 67%

Solution b:

No, advertising company for which Jacobs works will not be able to earn an economic profit as other company wil higher jacob at a higher cost if economic benefit persist.This bidding process will stop until Jacobs’s salary has been bid up to the point that no further economic profit remains