Suits Only,a dry-cleaning firm that specializes in cleaning business suits,operates in a perfectly competitive market.Robin Smith,an exceptionally talented manager,has been hired to manage Suits Only.In the dry-cleaning business,a manager typically makes a salary of $400 per week.Suits Only faces the long-run average and marginal costs shown in the figure below.In long-run competitive equilibrium,the market price for cleaning a business suit is $4.50. Given the above,Robin Smith is probably going to negotiate a salary of $______ per week,$______ of which is economic rent.

Question

Suits Only,a dry-cleaning firm that specializes in cleaning business suits,operates in a perfectly competitive market.Robin Smith,an exceptionally talented manager,has been hired to manage Suits Only.In the dry-cleaning business,a manager typically makes a salary of $400 per week.Suits Only faces the long-run average and marginal costs shown in the figure below.In long-run competitive equilibrium,the market price for cleaning a business suit is $4.50.  Given the above,Robin Smith is probably going to negotiate a salary of $______ per week,$______ of which is economic rent.

Quizplus · Accepted Answer

In a perfectly competitive market in long-run equilibrium, firms earn zero economic profit. Therefore, the most Robin Smith can negotiate for her salary is the going market rate for a manager, which is $400 per week. Any additional income earned by the firm is considered economic rent. Based on the provided information, Suits Only’s total cost at the profit-maximizing level of output (where MR=MC) is $3 per suit. At a market price of $4.50 per suit, the firm earns economic rent of $1.50 per suit. If the firm cleans 300 suits per week, its total revenue is $1,350 ($$$4.50 * 300 suits$$), which implies that its economic rent is $450 ($$$1.50 * 300 suits$$). If the manager’s salary is $475 per week, $400 of it is her base salary, and $75 is economic rent. Therefore, the correct answer is (B).

Suits Only,a Dry-Cleaning Firm That Specializes in Cleaning Business Suits,operates