The Story of Economic Rent: What Do Land, Athletics and Government Have in Common?

Module 04: Factor Markets Lesson 04/Activity 01

Economic rent is defined as a return over and above opportunity cost or the “normal” return necessary to keep a resource in its current use. Economic rent is any payment made to a resource above the amount necessary to induce any amount of the resource to be employed. Economic rent can also be defined as the amount over and above the opportunity cost necessary to keep the resource in its current use.

Part A 1. Assume that the quantity of a certain type of available land is 300,000 acres and the demand for this land is the data given in Figure 50.1.

(A) Plot on Figure 50.2 the supply and demand curves for this land.

(B) The pure rent per acre on this land will be ______.

(C) The total quantity of land rented will be ______acres.

(D) If landowners were taxed at a rate of $250 per acre for their land, the pure rent on this land after taxes would be ______, but the number of acres rented would be ______.

AP/IB Economics Lausanne Year 1, Sem. 1 Module 04: Factor Markets Lesson 04/Activity 01

2. Figure 50.3 gives the yields, or output per acre, in bushels on three grades of land resulting from varied amounts of expenditure on workers, fertilizer, etc. (Use only these data; don’t try to estimate what would happen if other amounts are expended.) To answer the questions below, apply your marginal-analysis skills to the data in the table.

(A) If the product sells for $1.00 a bushel, how many dollars per acre should be spent on Grade A land? ______Grade B land? ______Grade C land? ______

(B) In a competitive market, what do you think the rental price would be for an acre of: Grade A land? ______Grade B land? ______Grade C land? ______

(Note: Economic rent is defined as a return over and above opportunity cost of the “normal” return necessary to keep a resource in its current use. Using this logic, you can approach Question 2(B) by asking: “What is the most someone would be willing to pay for the right to use an acre of each type of land?”)

Part B Land is not the only resource with a fixed supply. For example, the supply of a star athlete is fixed. Suppose Tiger Woods earns $50 million a year.

3. Assume that Tiger Woods’ next-best option after playing golf is to work as a high school teacher and coach. He could earn $50,000 a year in this job. How much economic rent is involved in Tiger’s salary as a golfer? ______

4. Now assume that someone else is as good at soccer as Tiger Woods is at golf. If this person wanted to play soccer in the United States, would this player receive more or less economic rent than Tiger does for playing golf? Support your answer.

______

AP/IB Economics Lausanne Year 1, Sem. 1