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

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

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. What would the average fixed costs of this
plant be 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% market share? What would be its cost disadvantage if
it achieved only a 1% share? If prior to entering the market, the firm
contemplates achieving only a 1% share, is it doomed to such large cost
disparity?

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