PROBLEM SET 2: COSTS AND WELFARE (1) Forward integration? Or not? [Past exam question] McrochipX is a company that speciaJiZes in producing microchips- It sells these microchips to high tech manufacturers of electronic control devices. The cost of producing a microchip is $30, and McrochipX can sell the chips to other hightech manufacturers for $55. MicrochipK can produce, at most, 1 million microchips each year. Suppose now, that the workers' unions of manyr of the lrey hightech manufacturers of electronic control devices (Microchip-K's customers} go on strike. Under these new market conditions, MicrochipX receives outside orders of only Bj units from the hightech rnanucturers (at the same price of $55], and so it has some idle capacity. its a result, the company is considering producing a certain electronic control device by itself. Producing each control device involves putting in TWO microchips plus an additional Sill in labor costs. To open this nevir product line, MicrochipX must rent a new plant, which costs $2 million each year. It also needs to borrow $30 million as working capital {the annual interest rate is 5%}- The company can sell each control device for 315D. (a) If MicrochipX opens the new product line, what are its prots from producing each control device (if we only take into account variable costs}? {b} Should IMicrochipX start the new product line to utiliZe its Ezuoit unused microchip capacity? Suppose that Microchip-X can now decline some outside orders of microchips if it wants to produce more electronic control devices by itself. (c) What is the cost of producing an additional electronic control device if IMicrochipX uses more microchips than its IROQUOISmm unused capacity? Should Microchip-X decline any outside orders