What is the short-run equilibrium price of nickel

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Reference no: EM132472863

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. 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 $11 $6 million 3 million 15

Laterite $16 $10 million 2 million 50

Suppose the annual demand for nickel is estimated to be , 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 $120 million, and a laterite mine requires an investment of $180 million. The typical cost of capital for nickel producers is approximately 10%, and nickel mines have long lives (for simplicity, assume they are infinitely lived). 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?

d) What is the entry price (recall any additional nickel supplies would be laterite mines)?

Suppose now that 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 QD=220 - 5P, where quantity is in millions of tons per year and price is US dollars per ton.

e) What is the new equilibrium price for nickel in the short run?

f) What is the new equilibrium price for nickel in the long run? Relative to the short-run equilibrium you computed in Part (e), 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?

Reference no: EM132472863

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