Business, 05.05.2020 05:41 keyonaemanieevans
Stanley Ford makes mountains out of molehills. He can do this with almost no effort, so for the purposes of this problem, let us assume that molehills are the only input used in the production of mountains. Suppose mountains are produced at constant returns to scale and that it takes 50 molehills to make 1 mountain. The current market price of molehills is $8 each. A few years ago, Stan bought an"option" that permits him to buy up to 2,000 molehills at $4 each. His option contract explicitly says that he can buy fewer than 2,000 molehills if he wishes, but he can not resell the molehills that he buys under this contract. In order to get governmental permission to produce mountains from molehills, Stanley would have to pay $10,000 for a molehill-masher’s license.
a. The marginal cost of producing a mountain for Stanley is if he produces fewer than 20 mountains. The marginal cost of producing a mountain is if he produces more than 20 mountains.
b. If the price of mountains is $1,600, how many mountains will Stanley produce?
c. The government is considering raising the price of a molehill-masher’s license to $11,000. Stanley claims that if it does so he will have to go out of business. Is Stanley telling the truth? What is the highest
fee for a license that the government could charge without driving him out of business?
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Stanley Ford makes mountains out of molehills. He can do this with almost no effort, so for the purp...
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