Economics: Production inputs.

Let's put dollar amounts on the flows in the circular flow diagram of Figure 2.2.

a) Suppose that businesses buy a total of $100 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $60 billion in wages, $10 billion in rent, and $20 billion in interest, how much are households paid for providing entrepreneurial ability?

b) If households spend $55 billion on goods and $45 billion on services, how much in revenues do businesses receive in the product market?

Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.

Monthly Rent Apartments Demanded Apartments Supplied

$2500 10,000 15,000

2000 12,500 12,500

1500 15,000 10,000
1000 17,500 7500
500 20.000 5000

a) What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?

b) If the local government can enforce a rent-control law that sets the maximum monthly rent as $1500, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month.

c) Suppose that a new government is elected that wants to keep out the poor. It declares that the maximum that can be charged is $2500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?

d) Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, by how many units of housing would th government have to increase the supply of housing in order to get the market equilibrium rental price to fall to $1500 per month? To $1000 per month? To $500 per month?

Solution Summary

The problems deal with estimating the payments made to all the elements involved in the production process.