Imagine a manufacturing industry that produces 100 million units of compact digital cameras annually in the US market. Suppose the minimum efficient scale (MES) for the production of digital cameras is 10 million units annually.
a. For an entrant, what would be the minimum market share to reach the MES?
b. Suppose that the cost to build a plant that produces 10 million units annually is USD $200 million. Assume the required cost of capital is 10% annually. For simplicity, suppose digital cameras in the US market are homogeneous and traded at $200 per unit. Let the profit margin of the product be Z %. Suppose the plant will be active permanently (i.e., it will not stop producing goods after certain years). What would be the present value of the USD $200M investment?
c. What would be the minimum profit margin to make the investment reasonable?