End of Chapter 4 Questions and Answers

End of Chapter 4 Questions and Answers - End of Chapter 4...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
End of Chapter 4 Questions and Answers 1. What is meant by a "factor of production"? Name four categories or types of productive factors. How does land differ from the other factors? Answer: All the necessary inputs required for production are called “factors of production”. There are four such factors: 1) Labor: includes workers and managerial staff 2) Capital: buildings, plant and equipment 3) Raw materials: necessary material inputs (including energy) which are processed to produce the required output 4) Land: required to construct buildings where machinery will be installed Land is fixed in location, even in the long run as it cannot be taken away from where it is. All the other factors are mobile. 2. Explain the "residual theory" of land value. Why is land value only the residual after other factors have been paid? Answer: In dividing up the value of the finished product among the four general factors of production, the defining characteristic of land that differentiates it from the other three factors is that land is fixed in location, even in the long run. You can never take land away to some other site where it might be able to earn more rent. The three more mobile factors (labor, raw material and capital) have to get paid first, in order to keep them from "running away" if they don't get paid an amount equal to what they could earn elsewhere, something the land cannot do. The gross value of the production on the site, measured by the total revenue earned by the clothing factory, will therefore go first to the mobile inputs. Only what is left over, after the mobile factors have been paid the necessary prevailing market costs, will there be anything available to the landowner in the form of rent. This is known as the "Residual Theory of Land Value". 3. What is the "bid-rent" curve and what is the relationship between the bid-rent and transportation costs? Answer: The "bid-rent" is the maximum rent that a potential user would "bid", or be willing to pay, for a site or location. This bid-rent produces the "residual value" calculated over distance. A bid-rent function is depicted on a graph with the vertical axis located at the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/07/2012 for the course FIN 4380 taught by Professor Staff during the Spring '08 term at Texas State.

Page1 / 4

End of Chapter 4 Questions and Answers - End of Chapter 4...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online