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Pricing Factors of Production & Economic Rent

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Three machines are employed in an isolated area. They each produce 2,000 units of output per month, the first requiring $20,000 in raw materials, the second $25,000, and the third $28,000. What would you expect to be the monthly charge for the first and second machines if the services of the third machine can be hired at a price of $9,000 per month? Which parts of the charges for the first two machines are economic rent?

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Solution Summary

Calculation of the expected monthly charge for equipment based on costs of operation.

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The third machine costs a total of $28,000 + $9,000 to run, or $37,000. The prices of the other two machines will be bid up so their use provides no additional advantage, even though they are ...

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