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2. Dan is the owner of a small sawmill in Squamish, British Columbia, which produces pressure treated lumber for local home improvement stores. The output of his sawmill, denoted q, is measured in tons/month. Dan has a detailed record of the output and total cost for each of the past 24 months (available on the course website). a) Using the cost data, estimate the monthly total cost function for Dan's sawmill. Include your regression results in your assignment, and carefully explain how you identified the total cost function. (Note: For all estimated coefficients carry 2 non-zero digits to the right of the decimal point.) (7 points) b) Dan bought the sawmill seven years ago for $640,000, and he invested another $280,000 to replace some of the old machines in the sawmill. A local real estate agent, who 2 specializes in commercial properties, told Dan that he could sell the sawmill for $840,000. Dan has a small investment account to save for his retirement (which he considers the best option to invest his savings). His average annual return is 7 percent, and he believes that he can get the same return in next few years. (i) What is Dan's monthly opportunity cost of producing pressure treated lumber in his own sawmill? (ii) What are the total sunk costs associated with Dan's purchase of the sawmill and the new machines? (iii) Use your cost estimation from part (a) and write down Dan's new monthly total cost function for the production of pressure treated lumber, accounting for the information above. (4 points) c) Suppose Dan wants to produce 65 tons of pressure treated lumber next month. Use your new cost function from part (b) to derive Dan's (i) marginal cost of production (MC), and (ii) average total cost of production (ATC), when producing 65 tons of lumber. Then briefly explain the economic meaning of these two numbers. (4 points) d) Without doing any math, can you infer from your answer to part (c) whether Dan's sawmill exhibits economies of scale when producing 65 tons of lumber? Briefly explain. (3 points)