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market In the world market for copper, there are two types of copper mines: Type 1 (primarily located in North America) and Type 2 (primarily
market In the world market for copper, there are two types of copper mines: Type 1 (primarily located in North America) and Type 2 (primarily located in Asia and South America). Each type of mine incurs five "buckets" of costs: (1) direct materials; (2) energy inputs (such as electricity and natural gas); (3) shipping; (4) production labor; and (5) production and administrative overhead. Direct materials, energy inputs, and shipping services are purchased in competitive spot markets, and the total monthly costs that a firm incurs on these items vary in direct linear proportion to the quantity of copper produced in the mine during that month. If a mine produces no copper in a particular month, it incurs no direct materials, energy, or shipping costs. By contrast, the total monthly costs for production labor and overhead are volumeinsensitive: the levels of these costs do not vary with the volume of production in the mine. Even if the mine temporarily suspended operations for a month (i.e., produced zero output in that month), the mine would still incur the same total monthly cost for labor and overhead that it would have incurred had the mine produced a positive volume of copper. Labor and overhead costs would "go away" only if the mine was permanently shut down and withdrawn from the industry. Each type of mine has a capacity that dictates the maximum amount of copper that can be produced in a given month. The firm can produce any volume of output in the mine, provided that it does not exceed this capacity. The table below shows the cost profiles of the two different types of mines, as well as their capacities (expressed as tons of copper per month). It also shows the number of mines that are active in the world market. All costs are expressed on an average cost basis (i.e., per ton of copper produced). The average costs of labor and overhead indicate what the per-ton costs would be if a mine produced at full capacity. Task 1: Draw the marginal cost curve (MC) and the average total cost (ATC) curve for a Type 1 mine. Your curves should be as neat as possible, but they do not have to be absolutely, perfectly precise. You should, however, clearly label each curve. Task 2: Draw the short-run industry supply curve for the world copper market. Please indicate how much copper would be supplied in a given month if the price of copper were (a) $1,500 per ton; (b) $1,000 per ton; (c) $500 per ton; and (d) $200 per ton. Task 3: Suppose that the world demand curve for copper is expected to be given by the formula D(P)=6,700,000,1,000P, where D(P) denotes the quantity of copper demanded (measured in tons per month) when the market price is P (measured in dollars per ton). Given the supply curve you constructed, what would we expect to be the market equilibrium price for copper? How much copper will be bought and sold at this equilibrium price? How much copper will be produced by all of the Type 1 mines together? How much copper will be produced by all of the Type 2 mines together? (Drawing a careful picture of the demand and supply curves can be helpful; you may want to use the axes below for this.) Task 4: (Think of this part as "independent" from Task 3): Suppose that the market price of copper is expected to be $1,000 per ton over the long run. Given this price expectation, would the owners of Type 1 mines want to permanently shut down their mines and withdraw them from the market? Would owners of Type 2 mines want to permanently shut down their mines and withdraw them from the market? Briefly explain your answer. For the purpose of this question, you may assume that a mine has no scrap value, and has no alternative use to which it could be redeployed if it is withdrawn from the copper market. market In the world market for copper, there are two types of copper mines: Type 1 (primarily located in North America) and Type 2 (primarily located in Asia and South America). Each type of mine incurs five "buckets" of costs: (1) direct materials; (2) energy inputs (such as electricity and natural gas); (3) shipping; (4) production labor; and (5) production and administrative overhead. Direct materials, energy inputs, and shipping services are purchased in competitive spot markets, and the total monthly costs that a firm incurs on these items vary in direct linear proportion to the quantity of copper produced in the mine during that month. If a mine produces no copper in a particular month, it incurs no direct materials, energy, or shipping costs. By contrast, the total monthly costs for production labor and overhead are volumeinsensitive: the levels of these costs do not vary with the volume of production in the mine. Even if the mine temporarily suspended operations for a month (i.e., produced zero output in that month), the mine would still incur the same total monthly cost for labor and overhead that it would have incurred had the mine produced a positive volume of copper. Labor and overhead costs would "go away" only if the mine was permanently shut down and withdrawn from the industry. Each type of mine has a capacity that dictates the maximum amount of copper that can be produced in a given month. The firm can produce any volume of output in the mine, provided that it does not exceed this capacity. The table below shows the cost profiles of the two different types of mines, as well as their capacities (expressed as tons of copper per month). It also shows the number of mines that are active in the world market. All costs are expressed on an average cost basis (i.e., per ton of copper produced). The average costs of labor and overhead indicate what the per-ton costs would be if a mine produced at full capacity. Task 1: Draw the marginal cost curve (MC) and the average total cost (ATC) curve for a Type 1 mine. Your curves should be as neat as possible, but they do not have to be absolutely, perfectly precise. You should, however, clearly label each curve. Task 2: Draw the short-run industry supply curve for the world copper market. Please indicate how much copper would be supplied in a given month if the price of copper were (a) $1,500 per ton; (b) $1,000 per ton; (c) $500 per ton; and (d) $200 per ton. Task 3: Suppose that the world demand curve for copper is expected to be given by the formula D(P)=6,700,000,1,000P, where D(P) denotes the quantity of copper demanded (measured in tons per month) when the market price is P (measured in dollars per ton). Given the supply curve you constructed, what would we expect to be the market equilibrium price for copper? How much copper will be bought and sold at this equilibrium price? How much copper will be produced by all of the Type 1 mines together? How much copper will be produced by all of the Type 2 mines together? (Drawing a careful picture of the demand and supply curves can be helpful; you may want to use the axes below for this.) Task 4: (Think of this part as "independent" from Task 3): Suppose that the market price of copper is expected to be $1,000 per ton over the long run. Given this price expectation, would the owners of Type 1 mines want to permanently shut down their mines and withdraw them from the market? Would owners of Type 2 mines want to permanently shut down their mines and withdraw them from the market? Briefly explain your answer. For the purpose of this question, you may assume that a mine has no scrap value, and has no alternative use to which it could be redeployed if it is withdrawn from the copper market
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