Yes I mean a $5 VPS that is processing all network traffic for the entire atmosphere.

Generally you don't have to do this! There's lots of people running relays that are open access. But if you want your own it's very cheap. List of relays: https://tangled.org/firehose.club/community-firehose-list

Can you also fit a PDS to host yourself on on that VPS? Yeah I expect that it would fit very easily. PDS's have a lot less traffic hitting them than ActivityPub, they can be way smaller. They are quite lightly loaded! Because... there are relays in front of them!