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sol_even_8

# sol_even_8 - Chapt er 8 The Quest For Pr ofit And T he I...

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Chapter 8 The Quest For Profit And The Invisible Hand Q. 2, 4, 6, 8, 10

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Chapter 8, Problem 2 2)  Explain why new software firms that give away their software  products at a short-run economic loss are nonetheless able to sell  their stock at positive prices.
The reason these firms’ shares are valuable is that once their  products have established a market niche, the firms will cease to  give them away.   The anticipated future profits of such companies lead investors to  bid for their shares now.

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Chapter 8, Problem 4 4)  The city of New Orleans has 200 advertising companies, 100 of  which employ designers of normal ability at a salary of \$100,000 a  year.  Paying this salary, each of the 199 firms makes a normal  profit on \$500,000 in revenue.  However, the 200 th  company  employs Janus Jacobs, an unusually talented designer.  This  company collects \$1,000,000 in revenues because of Jacob’s talent.
a) How much will Jacobs earn?  What proportion of his annual salary  will be economic rent? Ordinary designers get a salary of \$100,000 Firms earn revenue of \$500,000 without hiring Jacobs Firms earn revenue of \$1,000,000 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 = \$1,000,000 - \$500,000     = \$500,000 Therefore, Jacobs earn \$500,000 + \$100,000 = \$600,000 a year

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a) What proportion of his annual salary will be economic rent? Economic rent:  the amount by which the payment to a factor of  production exceeds the supplier’s reservation price.  The factor of  production is not necessary limited only to land, it can accrue to  people as well. Salary that the firms pay Jacobs = \$600,000 Jacobs’s reservation price = \$100,000 (the amount he could earn  outside) Economic rent = \$600,000 - \$100,000 = \$500,000 Therefore, 5/6 of his annual salary is economic rent.
a) Why won’t the advertising company for which Jacobs works be  able to earn an economic profit?

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