Question 2 [20 MARKS] a. Wages P25,000 Interest paid on loans 3,000 Other expenditures for inputs 31,000 Total Revenue 90,000 Katso's Pet Salon hires you to determine the company's status. The data above provides information on the company's annual costs and revenues. Katso spends at least 40 hours a week at her place of business. If she closed the salon, she could work for her competitor and earn P15,000 per year. She also owns the building that houses the salon and could rent it out for P18,000 per year if she closes her business.

Calculate the economic cost and economic profit for Katso's Pet Salon. Would an accountant come to the same conclusion about the profitability of this firm? Explain. (10 marks)

b. When Katso Corporation produces 35 units of output, its average variable cost is P5. The marginal cost of the 36th unit of output is P7. If the firm choose to produce the 36th unit of output, what will happen to average variable cost? Explain. (3 marks) c. How is a long-run average cost curve different from a short-run average cost curve? How are they related? (3 marks)

c. Toothpicks are sold in a perfectly competitive market. The market price is currently P3 per box of one hundred toothpicks. At its current level of production, a representative firm in the toothpick industry is producing at a level of output such that long-run average cost is P3.25 per box of one hundred toothpicks. Given this information, is the toothpick industry in equilibrium? Explain