PROBLEM SET 2: COSTS AND WELFARE (1) Forward integration? Or not? [Past exam question] Microchip-X is a company that specializes in producing microchips. It sells these microchips to high- tech manufacturers of electronic control devices. The cost of producing a microchip is $30, and Microchip-X can sell the chips to other high-tech manufacturers for $55. Microchip-X can produce, at most, 1 million microchips each year. Suppose now, that the workers' unions of many of the key high-tech manufacturers of electronic control devices (Microchip-X's customers) go on strike. Under these new market conditions, Microchip-X receives outside orders of only 800,000 units from the high-tech manufacturers (at the same price of $55), and so it has some idle capacity. As 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 $50 in labor costs. To open this new product line, Microchip-X must rent a new plant, which costs $2 million each year. It also needs to borrow $20 million as working capital (the annual interest rate is 5%). The company can sell each control device for $150. (a) If Microchip-X opens the new product line, what are its profits from producing each control device (if we only take into account variable costs)? (b) Should Microchip-X start the new product line to utilize its 200,000-unit 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 Microchip-X uses more microchips than its 200,000-unit unused capacity? Should Microchip-X decline any outside orders?(2) Impact of a price ceiling in the instant oatmeal market [Past exam question] The demand and supply curves for instant oatmeal are as follows: . Q.=10-0.5P, where Q, is the quantity of instant oatmeal packets (in million units) demanded when the price consumers pay is P. Q: = -2+ P. when P, is greater than or equal to 2; Q, = 0 when P