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Other Factors of Production: Land and Capital quiz #1 Flashcards

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Other Factors of Production: Land and Capital quiz #1
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  • What is the opportunity cost of investing in capital in microeconomics?
    The opportunity cost of investing in capital is the return that could have been earned if the resources used to acquire capital had been invested elsewhere, such as in alternative assets or consumption. It represents the value of the next best alternative forgone.
  • How are lenders compensated for the opportunity cost of providing capital?
    Lenders are compensated for the opportunity cost of providing capital through the rent (or interest) they earn, which reflects the return they receive for lending their funds instead of using them for other investments or consumption.
  • What does the supply curve for land look like and why?
    The supply curve for land is perfectly inelastic, represented as a vertical line, because the quantity of land is fixed and does not change with price. This means no matter how high the rental rate goes, the amount of land available remains the same.
  • How is the demand for land determined in microeconomics?
    The demand for land is determined by the marginal revenue product (MRP) of land, which measures the additional revenue generated by using one more unit of land. The MRP curve for land serves as its demand curve.
  • What is included in the economic definition of land as a factor of production?
    Land includes not only physical land but also natural resources found on or in the land, such as forests and oil deposits. These resources are considered part of the land category in economics.
  • How is the equilibrium rental rate for land established?
    The equilibrium rental rate for land is established at the intersection of the perfectly inelastic supply curve and the downward-sloping demand (MRP) curve. This point determines both the rental price and the fixed quantity of land used.
  • What distinguishes the supply curve for capital from that of land?
    The supply curve for capital is upward sloping, meaning more capital is supplied as the rental price increases. In contrast, the supply of land is perfectly inelastic and does not change with price.
  • What does the demand curve for capital represent?
    The demand curve for capital represents the marginal revenue product (MRP) of capital, indicating how much additional revenue a firm earns from employing one more unit of capital. This curve slopes downward, similar to labor and land.
  • How is the equilibrium rental rate for capital determined?
    The equilibrium rental rate for capital is found where the downward-sloping demand (MRP) curve intersects the upward-sloping supply curve. This intersection sets both the rental price and the quantity of capital used.
  • What is meant by physical capital in the context of factors of production?
    Physical capital refers to tangible assets like factories and equipment that are used to produce goods and services. It does not include human capital, which consists of skills and knowledge.