sol_even_8

sol_even_8 - Chapter 8 The Quest For Profit And The I...

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Unformatted text preview: Chapter 8 The Quest For Profit And The I nvisible Hand Q. 2, 4, 6, 8, 10 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. 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 Jacobs 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 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 suppliers 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 Jacobss 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 wont the advertising company for which Jacobs works be able to earn an economic profit?...
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sol_even_8 - Chapter 8 The Quest For Profit And The I...

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