Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

298 INPUT PRICING AND EMPLOYMENT [CHAP. 13
13.11 What is the firm’s quasi-rent at the profit-maximizing level of output in Fig. 13-7?
At the best level of output of 400 units of commodity X, AVC ¼ $8. The TVC of $3200 is a cost which the firm
must pay in order to retain the use of its variable inputs. The difference of $800 between the firm’s TR of $4000 and
its TVC of $3200 is a quasi-rent and represents a payment to the firm’s fixed inputs, which the firm need not receive
in order to produce commodity X in the short run. Note that the quasi-rent of this firm can be equal to, greater than,
or less than the TFC of the firm.
13.12 Fig. 13-14 refers to a perfectly competitive firm in the product market. (a) What is the amount of total
profit and quasi-rent for this firm, if P x ¼ $18, $13, $9, $5? (b) Are fixed inputs rewarded according to
their MRP (c) What happens to quasi-rent in the long run?
Fig. 13-14
(a) When P x ¼ $18, the firm’s best level of output is 7000X (given by point A), its
TR ¼ ($18)(7,000) ¼ $126,000, its TC ¼ (14)(7000) ¼ $98,000, and its TVC ¼ ($10)(7,000) ¼ $70,000.
Thus at P x ¼ $18, this firm’s total profits ¼ TR 2 TC ¼ $126,000 2 $98,000 ¼ $28,000. This firm’s
quasi-rent ¼ TR 2 TVC ¼ $126,000 2 $70,000 ¼ $56,000.
When P x ¼ $13, the firm’s best level of output is 6000X (given by point B), its TR ¼ $78,000, its
TC ¼ $78,000, and its TVC ¼ $48,000. Thus this firm’s total profits ¼ 0, while its quasi-rent ¼ $30,000.
When P x ¼ $9, the firm’s best level of output is 5000X (given by point C), its TR ¼ $45,000, its
TC ¼ $70,000, and its TVC ¼ $30,000. Thus this firm’s total profits ¼ 2$25,000, while its quasirent
¼ $15,000.
When P x ¼ $5, the firm’s best level of output is 4000X (given by point D, the shut-down point), its
TR ¼ $20,000, its TC ¼ $68,000, and its TVC ¼ $20,000. Thus this firm’s total profits ¼ 2$48,000,
while its quasi-rent ¼ 0.
(b) Quasi-rent is the return to fixed inputs. Fixed inputs are paid whatever is left from the firm’s TR after the firm
has paid its variable inputs. Thus, fixed inputs are not paid according to the MRP scheme.
(c) Since all inputs are variable in the long run, quasi-rent disappears in the long run. (Indeed, quasi-rent is a
concept which by definition has meaning only in the short run.)
INPUT PRICING AND EMPLOYMENT WITH PERFECT COMPETITION IN THE INPUT
MARKET AND MONOPOLY IN THE PRODUCT MARKET
13.13 (a) What is the profit-maximizing level of output for the monopolistic (or imperfectly competitive)
seller of commodity X? (b) What is the best (least-cost) input combination to produce any level of
output if the firm in part (a) is a perfect competitor in the input market? (c) State the condition for
profit maximization for the firm in parts (a) and (b). (d ) With reference to Fig. 13-15, indicate
whether the firm is using the least-cost input combination and producing its best level of output at
points H and E.