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23 January, 19:55

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.

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  1. 23 January, 23:29
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    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
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