1. A visiting professor at The HK University of Stress and Tension, Professor Ernie, makes mountains out of molehills. Molehills are the only input used for producing mountains, and it takes 100 molehills to make 1 mountain. The market price of molehills is $20 each. A few years ago, Ernie bought an option contract that allows him to buy up to 2,000 molehills at $10 each. The option contract stipulates that he can buy fewer than 2,000 molehills, but he cannot resell the molehills obtained through the contract. In order to get governmental permission to produce mountains from molehills, Ernie paid $10,000 for molehill-masher license. (a) With the option contract, what is Ernie'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) Ernie 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 $1,600. How many mountains will Ernie produce and sell? (c) Calculate Ernie's total economic profit