A college professor at LeTall University, Professor Lai, makes mountains out of molehills.
The following provides the information about Lai’s production and cost.
ˆ Molehills are the only input for producing mountains. It takes 100 molehills to
make 1 mountain.
ˆ The market price of molehills is $20 each.
ˆ A few years ago, Lai acquired an option contract that allows him to buy up to 2000
molehills at $10 each. The contract stipulates that he can buy fewer than 2000
molehills but cannot resell the molehills that are obtained through the contract.
ˆ In order to get governmental permission to produce mountains from molehills, Lai
paid $10000 for molehill-masher license.
Based on the above, answer the following questions.
(a) With the option contract, what is Lai’s marginal cost of producing a mountain if
he produces fewer than or equal to 20 mountains? What is the marginal cost if he
produces more than 20 mountains?
(b) Lai is selling mountains in a perfectly competitive market, in which there is a great
mass of other college professors doing the same. The market price of mountains is
$1600. How many mountains will Lai produce and sell?
(c) The government is considering raising the molehill-masher license fee.
(i) Lai claims that he would have gone out of business if the license had costed
$11000. Is Lai telling the truth? Why?