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, firms earn zero economic profit in the long run. This means that in the long run, the price that the firm charges for its product equals its long-run average cost (including normal profit). Therefore, in this case, Suits Only will charge $4.50 for cleaning a business suit, which is equal to its long-run average cost.

Given that Suits Only faces the long-run average and marginal costs shown in the figure, we can see that its long-run average cost (LAC) curve intersects the marginal cost (MC) curve at a point where the cost is $4.50. This is the point where the firm will produce and where it will earn zero economic profit.

To find the salary that Robin Smith is likely to negotiate, we need to look at the economic rent that he can earn. Economic rent is the amount of money that someone earns above their opportunity cost. In this case, Robin Smith's opportunity cost is $400 per week, which is the typical salary for a manager in the dry cleaning business.

To find the economic rent, we need to look at the difference between the salary that Robin Smith is likely to negotiate and his opportunity cost. The salary that Robin Smith is likely to negotiate depends on the size of the economic rent that Suits Only can earn.

Looking at the figure, we can see that the firm's total cost at the point where LAC=MC=4.50 is $3.50 per suit. This means that the firm earns a profit of $1.00 per suit, which is its economic rent.

To calculate the economic rent that Robin Smith can earn, we need to multiply the economic rent per suit by the number of suits that the firm cleans per week. Let's assume that Suits Only cleans 100 suits per week. In this case, the economic rent per week is:

100 x $1.00 = $100

Therefore, the salary that Robin Smith is likely to negotiate is:

$400 (opportunity cost) + $100 (economic rent) = $500

Of this, $75 is economic rent ($500 - $400 = $100 economic rent per week, divided between the 1 manager and the 4 dry cleaners, equals $25 for the dry cleaners and $75 for the manager). Therefore, the best choice is B.

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