Question

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000 a year. Paying this salary, each of the 199 firms makes a normal profit on $500,000 in revenue. However, the 200th company employs Janus Jacobs, an unusually talented designer. This company collects $1,000,000 in revenues because of Jacobs’s talent.a. How much will Jacobs earn? What proportion of his annual salary will be economic rent?b. Why won’t the advertising company for which Jacobs works be able to earn an economic profit?

Answer 1

Answer:

a) Jacob will earn $600000. 5/6 of his annual salary will be economic rent.

b) The advertising company will not be able to make an economic profit because if they withhold some additional revenue made because of hiring person J, then person J will switch to another advertising company at a higher salary and that company keep on making profits. The company should bid for Person J until firms are indifferent between paying him $600,000 or hiring someone else for $100,000. Thus, the bidding of person J will continue until the salary of person J has bid up to a level where no company can make economic profits.

Explanation:

See the attached pictures for explanation.