Question

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

Answer 1

$0.10 per pound

Step-by-step explanation:

average fixed cost is the fixed costs of production divided by the quantity of output produced.

The question says for about $10 million annually the plant could produce about 100 million pounds of cereal per year.

Average fixed cost = fixed cost ÷ quantity.

= $10 million/100 million

= $0.10 per pound if it ran at capacity