Long Run: Increasing Returns
Consider a self-driving car, like a Tesla, that have a very large fixed cost relative to its marginal cost. Assume
it costs $1 billion dollars to develop a Tesla, but they can be produced at a constant cost of $10,000.
a. If Y is the number of Teslas produced and X is the amount spent on production, write the production
function and show graphically. Does it exhibit increasing returns?
b. If Tesla charges its marginal cost for a car, what are it's profits?
c. If Tesla charges $100,000, how many cars must it sell to break even? Explain how the scale of the
market matters.