Question

Suppose the local market for legal services has an upward sloping supply curve, PL = 150 +0.0001QL where PL is the price of legal services and QL is the number of hours of legalservices. If the equilibrium price of legal services is $250 per hour, what is the aggregateeconomic rent earned by lawyers in this market?
A) $50,000

B) $1,000,000

C) $50,000,000

D) $100,000,000

Answer 1

Answer:

C) $50,000,000

Explanation:

The aggregate rent is the surplus earned by the lawyers for operating over their cost at this market equilibrium.

In the picture attached, the rent is showed graphically.

At PL=$250 per hour, the amount of demanded hours is QL=1,000,000.

The oportunity cost at a zero hours level is PL(0)=$150.

The rent can be calculated as:

$Rent=\frac{QL_{equil} x (PL_{equil}-PL_0)}{2}\\\\\\Rent=\frac{1,000,000*(250-150)}{2}= \frac{1,000,000*(100)}{2}=50,000,000$

The aggregate rent is $50,000,000.

Answer 2

Answer:

The correct answer is option (C) $50,000,000

Explanation:

Given Data:

  PL = 150 + 0.0001QL

Pl = price of legal service

QL = number of hours in legal service

Equilibrium price of legal service = $250/hr

Economic rent earn = ?

From the equation given,

PL = 150 + 0.0001QL

when PL₁ = $250, we substitute to get the value of QL₁

QL₁ = (PL₁ - 150)/0.0001

      = (250-150)/0.0001

      = 100/0.0001

      = 1,000,000

At Zero hour, QL₀ = 0

Therefore, Pl₀ =  150 + 0.0001QL₀

                        = 150 + 0.0001 * 0

                        = 150+ 0

                        = $150

For calculating the aggregate economic rent, we use the formula;

Rent = [QL₁* (PL₁-pL₀)]/2

Substituting into the equation, we have

Rent =  [1,000,000 * (250-150)]/2

         = ( 1000000*100)/2

        = 100,000,000/2

         =$50,000,000