What would be the firms cost disadvantage

Reference no: EM13207022

Suppose that a firm comtemplating entering the market for breakfast cereal would need to invest $100 million in a production plant (or about $10 million annually on an amortized basis). Such a plant could produce about 100 million pounds of cereal per year.

a.) What would be the average fixed costs of this plant if it ran at capacity?

b.) Each year, U.S. breakfast cereal makers sell about 3 billion pounds of cereal. What would the firm's average fixed cost be if it captured a 2% market share?

c.) What would be the firm's cost disadvantage, relative to plants operating at capacity, if it achieved only a 1% share?

d.) Suppose that the plant the firm would need to build has no other use besides making cereal. Is this important for the firm's entry decision? Briefly explain why or why not?

Reference no: EM13207022

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