In August 2004, Infineon announced a deal with Taiwan's Winbond Electronics to build a new dynamic random-access memory (DRAM) factory. Infineon executive Ralph Heinrich hoped to secure a quarter of the global DRAM market: "the fight to survive in the DRAM industry depends largely on size - since the more chips a company churns out, the lower the cost per chip." DRAMs are cut from circular wafers of semiconductors. Wafers of 300 millimeter (mm) diameter potentially yield more than twice as many DRAMs as 200 mm wafers. A 300 mm wafer fabrication facility costs more to build and set up than a 200 mm facility. (Source: "Infineon's deal with Winbond reaffirms outsourcing strategy,"Asian Wall Street Journal, August 10, 2004.)

(a)

Assume that the variable costs of manufacturing 200 mm and 300 mm wafers are the same. Explain why the economies of scale in manufacturing DRAMs from 300 mm wafers are larger than with 200 mm wafers.

(b)

Infineon produces DRAMs from multiple factories, some of which are joint ventures with Taiwanese manufacturers. Does the cost per DRAM depend on the total quantity produced by the entire company or each individual factory?

(c)

When a wafer fabrication facility is first commissioned, the percentage of output that meets product standards (the "yield") tends to be low. Engineers then fine-tune the manufacturing process to increase the yield. What principle of cost does this illustrate?