Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

تمرين 18

According to the American Metal Markets Magazine, the spot market price of U.S. hot rolled steel recently reached $600 per ton. Less than a year ago this same ton of steel was only $300. A number of factors are cited to explain the large price increase. The combination of China's increased demand for raw steel-due to expansion of its manufacturing base and infrastructure changes when preparing for the 2008 Beijing Olympics-and the weakening U.S. dollar against the euro and yuan partially explain the upward spiral in raw steel prices. Supply-side changes have also dramatically affected the price of raw steel. In the last 20 years there has been a rapid movement away from large integrated steel mills to mini-mills. The mini-mill production process replaces raw iron ore as its primary raw input with scrap steel. Today, mini-mills account for approximately 52 percent of all U.S. steel production. However, the worldwide movement to the mini-mill production model has bid up the price of scrap steel. In December, the per-ton price of scrap was around $140, and it soared to $285 just two months later. Suppose that, as a result of this increase in the price of scrap, the supply of raw steel changed from Q s raw = 4,400 + 4 P to Q s raw = 800 + 4 P. Assuming the market for raw steel is competitive and that the current worldwide demand for steel is Q d raw = 4,400 + 8 P , compute the equilibrium price and quantity when the per-ton price of scrap steel was $140, and the equilibrium price-quantity combination when the price of scrap steel reached $285 per ton. Suppose the cost function of a representative mini-mill producer is C ( Q ) = 1,200 + 15 Q 2. Compare the change in the quantity of raw steel exchanged at the market level with the change in raw steel produced by a representative firm. How do you explain this difference?