1)The Imagine you are running Alcan in 1993 (and NOT Alcoa). Using the description
of the Aluminium industry provided in the case summary and the data from the
spread sheet (posted on Portal), how many tons you should produce that year (given
that year’s market price)? How much would you produce if instead the price had
dropped further to 950? Explain and provide clear support to your answers.
Smelter | Grand Baie | Beauharnois | Isle Maligne | Kinlochleven | Kambara A |
Country | Canada | Canada | Canada | UK | Japan |
Capacity | 180 | 48 | 73 | 11 | 20 |
Labor | 26973 | 11774 | 20025 | 3604 | 8596 |
Plant power and fuel | 1800 | 148 | 226 | 40 | 133 ...view middle of the document...
Assuming that the world aluminium market
is perfectly competitive, we expect that this will:
Answer : C. lead to a lower price and higher sold quantity of aluminium
If the cost of producing aluminium declines, then this means that at any given price, engineers will be willing to produce a larger quantity of aluminium. This will shift the supply curve to the right. This leads to excess capacity of aluminium in the market, leading to a decline in price as engineers try to sell their surplus. The decline in price leads to an increase in demand, resulting in a higher quantity of aluminium sold.
II. A competitive firm is producing at a point where its average total cost is higher than the price:
Answer : e. the firm should shut down in the long run (assuming nothing changes); there is not enough information to tell if it should stay open in the short run.
We don’t have any information on the long run price and the average total cost. However, assuming the price and the average total cost do not change, the firm should shut down. In the short run, if the marginal cost of producing is lower than the price, the firm can stay open (We do not have any information on the marginal...