Type of Basic Continuous Electric
Cost Process Casting Furnace
Materials $150 $140 $120
Labor $ 80 $ 75 $ 70
Capital $100 $100 $ 60
Energy $ 20 $ 15 $ 50
Other $ 45 $ 40 $ 25a. Production of steel by electric furnace is a relatively new development
(beginning in the late 1970s) and accounts for a growing fraction of
total steel sold. What is your prediction about the future production
share of this method? Explain.
b. If there were a new energy crisis (causing energy prices to triple),
how would this affect steel makers’ choices of production
methods?
c. Suppose the price of steel scrap is expected to fall significantly over
the next five years. What effect would this have on the choice of
production method?- In recent years, Chrysler Corporation initiated three-shift or nearly
continuous (21-hours-per-day) production at a number of its plants.
Explain why Chrysler’s decision might have been prompted by
movements in its wage costs or capital costs, or both. Why would
Chrysler have instituted this production change for its most popular
(and profitable) vehicles, its minivans and Jeep Cherokee? What risks
might such a plan pose? - A firm is producing a given amount of output at least cost using a mix of
labor and capital (which exhibit some degree of substitutability). Using
an isoquant graph, show that if one input price increases, least-cost
production calls for the firm to reduce that input (and increase the use
of the other). - Consider the production function Q 100L.5K.4. Suppose L 1 and
K 1 so that Q 100.
a. If L is increased by 1 percent, that is, to L 1.01, with capital
unchanged, what is the resulting percentage increase in output?
b. Describe the nature of returns to scale for this production function. - In her last-minute preparations for final exams, a student has set aside
five hours to split between studying for two subjects, finance and
economics. Her goal is to maximize the average grade received in the
two courses. (Note that maximizing the average grade and maximizing
the sum of the grades are equivalent goals.) According to her best
guesses, grades vary with study as follows:
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