Question

Tim is opening a new online store. He plans to hire two workers at \(\$ 10\) an hour. Tim is also considering buying or leasing some new computers. The purchase price of a computer is \(\$ 900\) and after three years it is worthless. The annual cost of leasing a computer is \(\$ 450\) a. In which factor markets does Tim operate? b. What is the price of the capital equipment and the rental rate of capital?

Short answer

a. Labor and capital markets. b. Price of capital equipment: \( \$ 900 \), rental rate of capital: \( \$ 450 \).

Step-by-step solution

- Identify the factor markets

Factor markets are where services of factors of production (not the actual goods and services) are bought and sold. Tim operates in the labor and capital markets. The labor market involves hiring workers, and the capital market involves buying or leasing computers.

- Determine the price of capital equipment

The price of the capital equipment is the purchase price of a computer. According to the problem, this price is \( \$ 900 \).

- Determine the rental rate of capital

The rental rate of capital is the annual leasing cost of a computer. According to the problem, this cost is \( \$ 450 \) per year.

Key concepts

Labor Market

The labor market refers to the supply and demand for labor, where employees find paying work, employers find willing workers, and wage rates are determined. In Tim's case, he plans to hire two workers at \(10 an hour for his online store.

Tim's actions in hiring workers show us the basics of the labor market:

• **Demand for Labor:** Employers like Tim create demand by needing workers for their businesses.
• **Supply of Labor:** Workers offer their skills and time in exchange for wages.
• **Wage Rates:** The \)10 hourly rate Tim is willing to pay is part of how wages are set in a competitive market, balancing demand and supply.

As Tim hires workers at a specific rate, he contributes to the economic activities that collectively determine overall wage levels in the market.

Capital Market

The capital market is where savings and investments are channeled between suppliers—such as households or companies—and those in need, like Tim's online store. Tim needs capital to start his business, either by buying or leasing computers.

Here's how the capital market works:

• **Demand for Capital:** Businesses (like Tim's) need funds to invest in equipment, technology, or expansions.
• **Supply of Capital:** This comes from individuals and institutions willing to invest or lend money.

Tim can either buy the computers for \(900 or lease them for \)450 annually. His decision on how to acquire the computers will depend on how much capital he has or can borrow. This dynamic illustrates how the capital market connects businesses' needs with available financial resources.

Price of Capital Equipment

The price of capital equipment refers to the cost of purchasing physical assets necessary for business operations. For Tim, this cost is \(900 for each computer. This purchase price is a critical consideration in business planning.

**Tim's Scenario:**

• **Initial Investment:** Tim has to consider the upfront cost of \)900 per computer.
• **Depreciation:** Since the value of the computers will drop to zero over three years, Tim must think about the cost's financial impact over time.

By understanding the price of capital equipment, Tim can decide if he wants to invest in purchasing these essential assets or explore other options like leasing.

Rental Rate of Capital

The rental rate of capital is the cost of using capital over a period without owning it. In Tim's case, the annual leasing cost of a computer is \(450. Knowing this helps Tim decide between buying and leasing.

Consider these points:

• **Leasing Costs:** The \)450 annual cost might be easier to manage than an upfront $900 expense.
• **Flexibility:** Leasing allows Tim to avoid long-term commitments if the business needs change.

By evaluating the rental rate of capital, Tim can make a strategic decision that aligns with his financial resources and business goals.