John an apprentice, engineer and amateur trumpet player, was earning ₦30 per week before accepting Full-time…

Analyze the question

John's transfer earnings (what he could earn in his next best alternative) are ₦30 per week. He now earns ₦150 per week. The question asks what to call the extra ₦120.

Explain the concept

• Transfer earnings are the minimum payment needed to keep a factor in its present use. This equals what it could earn in its next best alternative use.
• Economic rent is the payment to a factor above its transfer earnings. Economic rent = Actual earnings − Transfer earnings.
• Economic rent is most obvious where the supply of a factor is inelastic. A talented trumpet player is an example.
• Marginal physical productivity is the extra output produced by one more unit of a factor.
• Marginal income (revenue) productivity is the extra revenue from employing one more unit of a factor.
• Consumer's surplus is the difference between what a consumer is willing to pay and what they actually pay. It concerns buyers, not factor earnings.

Step-by-step solution

1. Current earnings = ₦150
2. Transfer earnings (previous best alternative) = ₦30
3. Economic rent = 150 − 30 = ₦120

The ₦120 is the surplus over what was needed to keep him in this job, so it is economic rent.

Answer: D, economic rent

Exam tip: When a question gives an old or alternative earning and a new, higher one, subtract them. The difference is economic rent, and the old earning is transfer earnings. Remember: Rent = Present earnings − Previous (transfer) earnings.