Question

Please answer the below questions

1. Explain how the Marginal Revenue Product of Labor is derived mathematically and explain what it means.

2. Explain the concept of Economic Rent and how it works with regard to wages.

3. Briefly explain how two interdependent markets move to general equilibrium.

4.. What does it mean when goods are allocated inefficiently and when they are allocated efficiently.

5. Briefly explain how to internalize positive and negative externalities.

Answer 1

1. Marginal revenue product of labor is derived mathematically by multiplying Marginal revenue by marginal product of labour.


Marginal revenue product of labor refers to the additional revenue generated by employing extra labor. It is generally computed to know the demand of labor in the market.

2. Economic rent is the income to factors of production which is in excess of the minimum level of income necessary to keep the factors of production glued into current employment. This happens usually when the factor is scarce. Hence, economic rent plays an important part with regards to wages. However, transfer earnings are minimum level of income that factor need to remain in employment. Earnings (wages) = Economic rent + transfer earning.
In case of factor with perfect inelastic supply, wages= economic rent ( no transfer earning)
perfectly elastic supply, wages = No economic rent

3. General equilibrium theory is different from partial equilibrium and suggests the functionary of an economy as a whole rather in parts. It suggests that markets are interdependent and they interact through whole demand and supply to reach equilibrium set of prices for the whole market or economy.

4. The concept of goods allocated efficiently relates to pareto optimality. It suggests that efficiency is reached at a point where it is impossible to reallocate resources to make one better off without making at least other worse off.

5. Externalities are the benefits or costs that affect a third party which has no contribution in the activity. Externalities can be positive ( spread of knowledge) and negative (pollution). Externalities are one of the causes of market failures and there have been debates to internalise externalities into the price mechanism so that people are made aware of the effects of externalities.
Externalities can be externalised through introducing taxes, provision of subsidies and establishment of property rights etc.