Question

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000 a year. The firms that employ designers of normal ability each collect $600,000 in revenue a year, which is just enough to ensure that each earns exactly a normal profit. However, the 200th company employs Janus Jacobs, an unusually talented designer. Because of Jacobs's talent, this company collects $1,000,000 in revenue a year.
a. How much will Jacobs earn?

$ per year.

What proportion of her annual salary will be economic rent?
Instructions: Enter your response as a percentage rounded to the nearest whole number.

%.
b. Will the advertising company for which Jacobs works be able to earn an economic profit?
Yes/No

Answer 1

Answer:

a. $700,000

86%

c. No

Explanation:

a. Jacobs will earn $700,000 per year. This equals the normal salary for a designer, $100,000, plus the economic rent he collects for his special talent, $600,000.  

6/7 or 0.857 or 86% of his salary is thus economic rent. This is found by 600,000/700,000

b. The answer is No. If Jacobs’s employer withholds some of the additional revenue it takes in as a result of hiring him, some other advertising company will offer him a higher salary and still manage to earn an economic profit. Bidding for Jacobs will continue until firms are indifferent between paying him $600,000 and hiring any other designer for $100,000.