firm produces two products, X and Y. The production technology displays the
following costs where C(i, j) represents the cost of producing I units of X and
j units of Y:
C(0, 50) = 100 C(5, 0) = 150
C(0, 100) = 210 C(10, 0) = 320
C(5, 50) = 240 C(10, 100) = 500
Does this production technology display
economies of scale?
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
that Governor Schwarzenegger (GAS) pays Besanko, Dranrove, Shanley, and
Schaffer (BDS) an advance of $5 million to write the script in Incomplete
Contract, a movie version of their immensely popular text on business strategy.
The movie contract includes certain script requirements, including that GAS
gets to play a strong, silent business strategist with superhuman analytic
powers. BDS spend $100,000 worth of their time to write the script that is
tailor made for the ex-Terminator (GAS). When the turn in the script, GAS
claims that it fails to live up to the contractual requirement that he have
several passionate love scenes, and he attempts to renegotiate. Given the
ambiguity over what constitutes passion, BDS are forced to agree.
What was BDS’ rent?
What is their quasi-rent? What
assumptions do you have to make to compute this?
Could BDS have held up GAS?