QUESTION THREE

a) What is economic rent? How does it differ from economic profit? [4 marks]

b) Ahmad's Car Washing Service is a small business that operates in the perfectly competitive residential car washing industry in Alor Setar. The short-run total cost of production is STC(Q) = 40+ 10Q + 0.1Q2 , where Q is the number of cars washed per day. The prevailing market price is RM20 per car. What is Ahmad's maximum daily profit? [4 marks]

c) Coffee is produced in a perfectly competitive market. Each identical firm has a total variable cost TVC(Q) = 40Q + 0.5Q2 . A firm's fixed cost is entirely non-sunk and equal to 50. Assume that there are 12 identical firms in this industry. The market demand for coffee is D(P) = 360 2P.

i. Calculate the price below which the firm will not produce any output in the short run. [2 marks]

ii. How many units of outputs does each firm produce? [2 marks]

d) The durian growing industry is perfectly competitive, and each producer has a longrun average cost function is given by () = 20 + + 144 . The market demand curve is () = 2488 - 2.

i. What is the long-run equilibrium price in this industry? [2 marks]

ii. How many active producers are in the durian growing industry in a long-run competitive market? [2 marks] e) Consider an industry in which general managers (GM's) run firms.

There are two types of GM's: exceptional and average. There is a fixed supply of 100 exceptional GM's and an unlimited supply of average GM's. Any individual capable of being a GM in this industry is willing to work for a salary of RM 144,000 per year. The long-run total cost of a firm that hires an exceptional GM at this salary is TCE(Q) = 144 + (1/2)Q2 , where Q is annual output in thousands of units and total cost is expressed in thousands of RM per year. The long-run total cost for a firm that hires an average GM per year is TCA(Q) = 144 + Q2 . The market demand curve in this market is D(P) = 7200 100P.

i. How much output will a firm with an average GM produce? [2 marks]

ii. How much output will a firm with an exceptional GM produce? [2 marks]