Economic rent

CFA Level I Economics
#1

I don’t understand below answer. How is this economic rent? I thought economic rent is when you have to pay extra to retain the asset but you don’t get extra output.

In below example, comparing web designing with derivatives analyis is two different things. how can you say her output as a derivatives analyst is not more than her output as web designer?

Thanks,

Hazel Green, CFA, earned $90,000 last year working as a derivatives analyst. She is also a skilled web page designer. Green could earn $70,000 per year in that occupation, which she has determined is her next-highest paying alternative. The difference between Green’s income as a derivatives analyst and her potential income as a web page designer is best described as:

A) economic rent. B) opportunity cost. C) marginal revenue product.

The correct answer was A.

Economic rent to a worker is the difference between what she earns and what she could earn in her next highest paying alternative employment. Her potential earnings in her next highest valued employment is her opportunity cost. Marginal revenue product (MRP) is the revenue from selling the output of one additional unit of an input. A high MRP makes it possible for a worker to earn economic rent.

#2

The explanation’s spot on: economic rent is the difference between the cost of an asset in its current use and the cost in its next best use.

For example, the lion’s share of Tiger Woods’ earnings is economic rent; I don’t know what his next best use is, but he certainly wouldn’t make the millions doing it that he does as a professional golfer.

Professional athletes and entertainers frequently have very high economic rent (their skills in their best use are rare, and in high demand); most blue collar workers have very low economic rent (their skills in their best use are commonplace).

#3

Ok thanks… i think I got it now.

#4

Good to hear.

#5

Economic rent is equal to revenue minus opportunity cost.