MBA 505: COST CURVES, SUPPLY CURVES, AND EQUILIBRIUM IN THE GLOBAL COPPER 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 volume- insensitive: 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 Labor and overhead costs would "go away" only if the mine was permanently shut down and withdrawn from the industry.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 on active or near-active status in the world market as of January 2013. 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.

Mine	Number of active or near-active mines: Jan. 2013	Direct Materials ($ per ton)	Energy ($ per ton)	Shipping ($ per ton)	Labor ($ per ton, assuming full capacity output)	Overhead ($ per ton, assuming full capacity output)	Capacity of a mine (tons per month)
Type 1	50	250	300	50	450	100	60,000
Type 2	40	150	200	100	150	100	100,000

Task 1:On the axes below (or using your own diagram) 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. I am trying to solve Task 1. My average variable cost and Marginal cost curves do not look correct. When I calculate average variable cost I get the same value every time ($600) because it divides out the tons produced. What should I be doing here.

Tons Variable Costs Fixed Costs Total Costs A.V.C A.F.C Marginal Costs | Avg Total Cost 0 $33,000,000 $33,000,000 7500 $4,500,000 $33,000,000 $37,500,000 $600 $4,400 $5,000 $5,000 15,000 $9,000,000 $33,000,000 $42,000,000 $600 $2,200 $600 $2,800 22,500 $13,500,000 $33,000,000 $46,500,000 $600 $1,467 $600 $2,067 30,000 $18,000,000 $33,000,000 $51,000,000 $600 $1, 100 $600 $1,700 37,500 $22,500,000 $33,000,000 $55,500,000 $600 $880 $600 $1,480 45,000 $27,000,000 $33,000,000 $60,000,000 $600 $733 $600 $1,333 52,500 $31,500,000 $33,000,000 $64,500,000 $600 $629 $600 $1,229 60,000 $36,000,000 $33,000,000 $69,000,000 $600 $550 $600 $1, 150 Marginal Cost Curve - Marginal Costs - Avg Total Cost $5,000 $4,000 $3,000 Output $2,000 $1,000 0 7500 15,000 22,500 30,000 37,500 45,000 52,500 60,000 Cost