Training Ricardian Rent Practice Test — Ricardian Rent
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Practice Test — Ricardian Rent

23 min Ricardian Rent

This practice test covers the full Ricardian Rent module: differential rent and the no-rent margin, extensive and intensive margin analysis, diminishing returns, economic rent vs. quasi-rent, the urban bid-rent model, resource rents, and the land value tax. Work through each question before checking the answer key.

Practice Test — Ricardian Rent

Practice Test — 20 Questions

1. Three grades: A=140 bu, B=110 bu, C (margin)=90 bu. Price $= \$6$/bu. Find $R_A$ and $R_B$.
2. In Question 1, a Grade D (60 bu) opens as the new margin at $p=\$8$/bu. Find all four rents.
3. State Ricardo's Rent Determination Principle. Does rent cause prices or do prices cause rent?
4. Technological progress raises all grades equally by 30 bu. What happens to differential rents?
5. $MP_L = 120 - 5L$, $p = \$2$/bu, $w = \$40$/worker. Find $L^*$ and land rent.
6. Using Q5, wages rise to $\$60$/worker. Find new $L^*$ and rent. How much did rent fall?
7. Total product $= 80L - 3L^2$, $p = \$5$, $w = \$100$. Find $L^*$ and rent.
8. On a no-rent margin plot, what does $p \cdot MP_L$ equal?
9. A CEO earns $\$10\text{M}$/year; her next-best offer is $\$2\text{M}$. What is her economic rent?
10. Is the salary paid to a uniquely talented artist mostly economic rent or transfer earnings? Explain.
11. Bid-rent: $R_0 = \$3{,}000$/m², $t = \$120$/km. Find rent at 8 km and the urban boundary.
12. A factory earns $TR = \$800{,}000$, $TVC = \$500{,}000$, fixed costs $= \$200{,}000$. Compute quasi-rent and economic profit.
13. Oil field revenue $= \$5\text{M}$/yr; operating cost $= \$1.5\text{M}$; capital cost $= \$1\text{M}$. Compute resource rent.
14. Why is a 100% land value tax non-distortionary?
15. Grade A land output = 200 bu; current margin output = 80 bu; price = $\$4$/bu. (a) Find $R_A$. (b) If price doubles, what is the new $R_A$?
16. Distinguish extensive margin rent from intensive margin rent.
17. $Q = 12L^{0.5}$, $p = \$4$, $w = \$24$. Find $L^*$ and rent. (Hint: $MP_L = 6L^{-0.5}$.)
18. In the bid-rent model, which firm type has a steeper rent gradient — a law firm needing CBD access or a warehouse needing cheap space?
19. What is the relationship between Ricardo's agricultural rent gradient and the urban bid-rent gradient?
20. Henry George claimed land rent is created by society, not landowners. Give two examples that support this view.
Show Answer Key

1. $R_A = 6(50) = \$300$; $R_B = 6(20) = \$120$.

2. New $Q_m = 60$. $R_A=8(80)=\$640$; $R_B=8(50)=\$400$; $R_C=8(30)=\$240$; $R_D=\$0$.

3. Prices determine rent. High corn prices (caused by demand growth) push cultivation to inferior land; the resulting extension of the no-rent margin creates rent on superior land. Rent is an effect, not a cause, of high prices.

4. Differential rents are unchanged. Equal improvement on all grades leaves $(Q_i - Q_m)$ unchanged for every grade.

5. $2(120-5L)=40 \Rightarrow L^*=16$. $Q=120(16)-2.5(256)=1920-640=1280$ bu. Rent $=2(1280)-40(16)=2560-640=\$1{,}920$.

6. $2(120-5L)=60 \Rightarrow L^*=12$. $Q=120(12)-2.5(144)=1440-360=1080$. Rent $=2(1080)-60(12)=2160-720=\$1{,}440$. Fall in rent $=1920-1440=\$480$.

7. $MP_L=80-6L$. Set $5(80-6L)=100 \Rightarrow L^*=\frac{300}{30}=10$. $Q=80(10)-3(100)=800-300=500$. Rent $=5(500)-100(10)=2500-1000=\$1{,}500$.

8. $p \cdot MP_L = w$ (the marginal unit earns exactly the wage; the land earns zero surplus).

9. Economic rent $= 10{,}000{,}000 - 2{,}000{,}000 = \$8\text{M}$/year.

10. Mostly economic rent. A uniquely talented artist has no close substitutes (highly inelastic supply of their specific talent). Transfer earnings are low (the artist would perform for much less rather than switch careers). The difference — the vast majority of earnings — is rent on scarce talent.

11. $R(8)=3000-960=\$2{,}040$/m²; boundary: $d=3000/120=25$ km.

12. Quasi-rent $= TR - TVC = 800{,}000-500{,}000=\$300{,}000$. Economic profit $= 300{,}000-200{,}000=\$100{,}000$.

13. Resource rent $= 5{,}000{,}000-1{,}500{,}000-1{,}000{,}000=\$2{,}500{,}000$/yr.

14. Land is in perfectly inelastic supply — the quantity available cannot be reduced by a tax. A 100% LVT therefore creates no wedge between supply and demand, causes no reduction in land offered to users, and generates no deadweight loss.

15. (a) $R_A = 4(120) = \$480$. (b) At $p=\$8$: $R_A = 8(120) = \$960$ — exactly doubles with the price.

16. Extensive margin: rent arises because a new (inferior) plot has lower output than existing plots — their advantage over the new margin is rent. Intensive margin: rent arises from the surplus of total output value over the wage bill on a fixed plot, where successive labour units earn diminishing marginal products.

17. $MP_L=6L^{-0.5}$. Set $4(6L^{-0.5})=24 \Rightarrow L^{-0.5}=1 \Rightarrow L^*=1$. $Q=12(1)=12$. Rent $=4(12)-24(1)=48-24=\$24$.

18. The law firm has the steeper bid-rent gradient (higher $t$). It gains more from CBD access (clients, courts, other firms), so it is willing to pay a large premium for central locations and its rent falls sharply with distance.

19. They are formally identical: in Ricardo's model, land value decreases as you move from the best to the marginal plot (falling quality); in the bid-rent model, land value decreases as you move away from the CBD (rising transport costs). Both models feature a single fixed attribute (fertility or access) whose gradient determines the rent schedule.

20. (i) A government-funded subway line raises the value of nearby land — landowners gain without any effort of their own. (ii) Population growth increases demand for urban space, raising all land values city-wide; individual landowners capture this appreciation even though society, not they, created the demand.

Economic Rent, Quasi-Rent & Modern Applications Back to Module