A college professor at LeTall University, Professor Lai, makes mountains out of molehills.
The following provides the information about Lai’s production and cost.
Molehills are the only input for producing mountains. It takes 100 molehills to
make 1 mountain.
The market price of molehills is $20 each.
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.
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?
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