Nickel deposits are generally found in two forms: sulfide or laterite. All major sulfide deposits have beenlocated and mines have been constructed, so any additional nickel supplies would be laterites (i.e.,entering firms will be of the laterite type). Laterites can be mined via open-cut methods which arefairly low cost; however, there is no simple separation technique to extract the metal. The rock must becompletely molten or dissolved to enable the nickel to be extracted. As a result, laterite projects requirea higher initial investment in capital equipment and face a higher marginal cost of production, due tothe cost of melting or dissolving the ore. Moreover, most of the as-yet-undeveloped laterite deposits arelocated in remote areas of developing countries where a large scale mining project would also requiresignificant investment in infrastructure. This further increases the necessary capital expenditure forpotential new entrants. Suppose the relevant cost data for the two technologies is given in the followingtable: Method AVC (perton) Total FC (permine per year) Capacity ofa singlemine (tonsper year) Number ofmines Sulfide $14 $8 million 4 million 20Laterite $19 $12 million 3 million 60 Suppose the annual demand for nickel is estimated to be Q D =435 - 5P , where quantity is in millions oftons per year and price is US dollars per ton. Suppose further that the capital investment necessary toconstruct a sulfide mine is $160 million, and a laterite mine requires an investment of $240 million. Thetypical cost of capital for nickel producers is approximately 10%, and nickel mines have long lives. Nickelmining equipment has negligible redeployment value.a) What is the short-run equilibrium price of nickel? b) What is the exit price for a sulfide mine?c) What is the exit price for a laterite mine? Suppose an innovation in battery technology reduces the world demand for nickel (one of the primaryuses for nickel is in rechargeable Nickel-metal hydride or NiMH batteries). Suppose the demand fornickel permanently changes to Q D =270 - 5P, where quantity is in millions of tons per year and price isUS dollars per ton.d) What is the new equilibrium price for nickel in the short run?e) What is the new equilibrium price for nickel in the long run? Relative to the short-run equilibrium youcomputed in Part (d), how many sulfide mines will exit the industry, compared to the situation given inthe table at the beginning of the problem? How many laterite mines will exit?
Nickel deposits are generally found in two forms: sulfide or laterite. All major sulfide deposits have been
located and mines have been constructed, so any additional nickel supplies would be laterites (i.e.,
entering firms will be of the laterite type). Laterites can be mined via open-cut methods which are
fairly low cost; however, there is no simple separation technique to extract the metal. The rock must be
completely molten or dissolved to enable the nickel to be extracted. As a result, laterite projects require
a higher initial investment in capital equipment and face a higher marginal cost of production, due to
the cost of melting or dissolving the ore. Moreover, most of the as-yet-undeveloped laterite deposits are
located in remote areas of developing countries where a large scale mining project would also require
significant investment in infrastructure. This further increases the necessary capital expenditure for
potential new entrants. Suppose the relevant cost data for the two technologies is given in the following
table:
Method AVC (per
ton)
Total FC (per
mine per year)
Capacity of
a single
mine (tons
per year)
Number of
mines
Sulfide $14 $8 million 4 million 20
Laterite $19 $12 million 3 million 60
Suppose the annual demand for nickel is estimated to be Q D =435 - 5P , where quantity is in millions of
tons per year and price is US dollars per ton. Suppose further that the capital investment necessary to
construct a sulfide mine is $160 million, and a laterite mine requires an investment of $240 million. The
typical cost of capital for nickel producers is approximately 10%, and nickel mines have long lives. Nickel
mining equipment has negligible redeployment value.
a) What is the short-run equilibrium price of nickel?
b) What is the exit price for a sulfide mine?
c) What is the exit price for a laterite mine?
Suppose an innovation in battery technology reduces the world demand for nickel (one of the primary
uses for nickel is in rechargeable Nickel-metal hydride or NiMH batteries). Suppose the demand for
nickel permanently changes to Q D =270 - 5P, where quantity is in millions of tons per year and price is
US dollars per ton.
d) What is the new equilibrium price for nickel in the short run?
e) What is the new equilibrium price for nickel in the long run? Relative to the short-run equilibrium you
computed in Part (d), how many sulfide mines will exit the industry, compared to the situation given in
the table at the beginning of the problem? How many laterite mines will exit?
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