A firm contemplating entering the 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. What would be the average fixed costs of this plant if it ran at capacity? 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 the disadvantage (how much higher the average cost would be) if it achieved only a 1 percent share?
A firm contemplating entering the market would need to invest $100 million to build a minimum efficient scale production plant (or about $10 million…
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