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 prior this same ton of steel was only $300. A number of factors were 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 observed upward spiral in raw steel prices. Supply-side changes 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 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 Qsraw = 4,400 + 4P to Qsraw = 800 + 4P.
Assuming the market for raw steel is competitive and that the current worldwide demand for steel is Qdraw = 8,000 – 8P, 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.
Instructions: Enter your responses as whole numbers.
Price when scrap was $140: $
Quantity when scrap was $140:
Price when scrap was $285: $
Quantity when scrap was $285:
Suppose the cost function of a representative mini-mill producer is C(Q) = 1,200 + 15Q2.
How much raw steel does a representative firm produce when the market price is $300?
How much raw steel does a representative firm produce when the market price is $600?
How does the change in production by a representative firm compare to the change in production at the market level when price goes up?
Production by a representative firm increases and production at the market level increases.
Production by a representative firm decreases and production at the market level decreases.
Production by a representative firm decreases while market-level production increases due to entry.
Production by a representative firm increases while market-level production decreases due to exit.