It is estimated that a firm contemplating entering the breakfast cereal market would need to invest $ 100 million to build a minimum efficient scale production plant (or about $ 10 million annually on an amortized basis). Such a plant could produce about 100 million pounds of cereal per year.
i) What would be the average fixed costs of this plant if it ran at capacity?
ii) Each year, U. S. breakfast cereal makers sell about 3 billion pounds of cereal. What would be the average fixed costs if the cereal maker captured a 2 percent market share? What would be its cost disadvantage if it only achieved a 1 percent share? Briefly explain.
iii) If, prior to entering the market, the firm contemplates achieving only a 1 percent share, is it doomed to such a large cost disparity? Briefly explain.