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Difficulty: HardFactors of Production and Their Rewards

An investor purchased a parcel of unimproved land in a commercial hub. Over five years, the site's economic value increased significantly due to surrounding urban infrastructure developments, without any physical modification, capital improvements, or operational management contributed by the owner. Which economic reward is exclusively accrued to the underlying natural factor of production in this scenario?

  1. Rent, which rewards a non-reproducible natural resource with a fixed supplyAnswer
  2. B
    Interest, which rewards the financial capital committed to acquiring the asset
  3. C
    Profit, which rewards the enterprise for taking the risk of real estate ownership
  4. D
    Wages, which reward the human effort involved in selecting the property location

Answer

Rent, which rewards a non-reproducible natural resource with a fixed supply
The correct answer identifies rent as the reward accruing to land. Land includes all natural resources provided by nature whose supply is overall fixed and non-reproducible. In this scenario, because the value growth is derived solely from the location of the natural resource without added capital improvements or human labor, the economic gain is classified as rent.

Step-by-Step Solution

1
Identify the factor of production highlighted in the scenario.
The unimproved site represents Land, as it is a natural resource provided without human intervention or prior production effort.
Land covers all natural assets (earth, water, minerals, site location) created by nature.
2
Analyze the nature of the economic return described.
The value appreciation occurred strictly due to external location factors without capital expenditure or managerial labour.
Returns generated purely by natural resources with inelastic aggregate supply are economic rent.
3
Match the factor of production (Land) to its specific economic reward.
Land earns Rent as its economic reward.
Wages belong to Labour, Interest belongs to Capital, and Profit belongs to Enterprise.

Key Concept

Factors of Production and Their Specific Economic Rewards
Estimated Time:2m 0s
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Topics

Factors of Production and Their Rewards

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