Excel for Prob Set 5
Dustin Goot
3d. As the market supply increases, the market price will drop. Since
the Canadian mines are price takers, they will respond to the drop in
price by restricting their own output.
B. “Cash production costs” likely refer to average variable costs for
Western producers. If the price drops below this level, there would be
no economic benefit for the Western mines to produce and they would
shut down.
C. They must have assumed that world prices would drop no lower than
82 cents/pound, since that is the average variable cost that they
expected at the mine. It would not make economic sense to expand
production if you did not expect prices to remain above your average
variable costs.
D. If marginal revenues from the plant do not exceed marginal costs,
as seems to be the case, the correct decision is to halt production no
matter what costs have been spent before. If it continued operating,
the plant would lose money on each pound of magnesium extracted.
E. If the plant does not lower its average variable costs (by, say,
negotiating subsidies or tax breaks or paying workers less) and world
prices for magnesium do not rise, the plant would remain closed
forever.
On Wed, Nov 3, 2010 at 2:36 PM, Daniel Zarovy
<daniel.za...@anderson.ucla.edu> wrote:
> my notes so far....
>