Question

Grace owns a house. She can rent her house for two years to one tenant for a profit of $24,000 a year, or she can rent it to two tenants each year for a profit of $10,000 per tenant per year. Calculate the economic rent over the course of two years of renting to one tenant.

Answer 1

Answer:

The economic rent will be $8,000

Explanation:

The formula to compute the economic rent renting to 1 tenant is as:

Economic rent = Marginal Product - Opportunity Cost

where

Marginal cost would be for two years  $24,000 × 2

= $48,000

Opportunity cost would be renting to 2 tenant per year

= $10,000  × 2 year × 2 person

= $40,000

Putting the values above:

= $48,000 - $40,000

= $8,000