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

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

Step-by-step 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

Answer 2

C) $50,000,000

Step-by-step 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=(QL_(equil) x (PL_(equil)-PL_0))/(2)\\\\\\Rent=(1,000,000*(250-150))/(2)= (1,000,000*(100))/(2)=50,000,000`

The aggregate rent is $50,000,000.