The City of New York has 200 advertising companies, 199 of which employ designer
ID: 1246472 • Letter: T
Question
The City of New York 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, thee 200th company employs John Smith, an unusually talented designer. This company collects $1,000,000 in revenues because of Smith's talent. A. How much will Smith earn? What promotion of his annual salary will be economic rent? B. Why won't the advertising company for which Smith works be able to earn an economic profit?Explanation / Answer
a) Jacobs will earn $600,000/year, the normal $100,000 salary for a designer plus the $500,000 economic rent he collects for his special talent (the extra revenue he brings in). 5/6 of his salary is economic rent. b) If Jacobs’s employer withholds some of the additional revenue it takes in as a result of hiring him, some other advertising company will offer him a higher salary and still manage to earn an economic profit. Bidding for Jacobs will continue until firms are indifferent between paying him $600,000 and hiring any other designer for $100,000.