Suits Only, a dry cleaning firm that specializes in cleaning men's and women's 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.
-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 men's and women's 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. 
-Robin Smith is probably going to negotiate a salary of $______ per week, $______ of which is economic rent.

Quizplus · Accepted Answer

To determine the economic rent, we need to find the minimum amount of salary that Robin Smith will negotiate for. This occurs at the point where the long-run marginal cost curve intersects the demand curve at the market price of $4.50. At this point, the long-run average cost is $3.75. Thus, the economic rent is the difference between the market price and the minimum salary Robin Smith will negotiate for, which is $4.50 - $3.75 = $0.75 per suit. Therefore, the salary that Robin Smith will negotiate for is $475 per week ($400 + $75 economic rent).

Suits Only, a Dry Cleaning Firm That Specializes in Cleaning