Case 4

Pacific Copper

Pacific Copper, a family-owned business, produces copper that is purchased by other firms to make wire, tubing, and sheets. The copper is produced in 1,000 -pound ingots and is identifiable as having been produced by Pacific Copper only by the firm's name stamped on each ingot.

PART I

Pacific operates the only copper mine and smelter in the South Pacific region. Because imports are limited by high transportation costs, the firm is essentially a monopoly with respect to the sale of copper ingots. The only real source of competition comes from scrap copper that has been melted back into ingot form. However, this scrap copper is considered inferior by buyers and sells for a substantially lower price.

Pacific Copper sells to approximately 200 firms in the region. Individual purchases are typically made by experienced buyers, but orders tend to be small and frequent to allow buyers to keep their inventory costs down. Although Pacific maintains a published list of prices, it is not uncommon for preferred customers to be secretly quoted a lower price or better credit terms.

Management estimates that demand for the firm's product is given by the equation

\(P=3,000-0.10 Q\)

where \(P\) is the price per ton and \(Q\) is the number of tons sold per year. Regression analysis suggests that the firm's average and marginal cost equations are

\(A C=2,400-0.10 Q+0.000002 Q^{2}\)

and

\(M C=2,400-0.20 Q+0.000006 Q^{2}\)

where $AC$ and $MC$ are average and marginal costs per ton.

Periodically, Pacific advertises in local business publications. Advertising costs $1,000 per unit, and the marginal effect of additional units of advertising on profit per period is estimated to be

\(\frac{\Delta \pi}{\Delta A}=5,000-1,000 A\) where \(A\) is units of advertising per period.

Requirements

1. If the objective of Pacific management is short-run profit maximization, what will be the optimal price and rate of output? How much profit is being earned?
2. Suppose that copper ore deposits are discovered on nearby islands, and various area entrepreneurs are considering the establishment of competing smelters to produce ingots. What factors should be considered by Pacific's managers in adopting a long-run pricing strategy? Be specific.

PART II

After 2 years, eight new firms enter the market. At the present time, Pacific has a 50 percent share of copper ingot sales and the rest of the market is shared equally by the eight new firms. During a recreational outing in Alaska, the managers of the nine copper-producing firms decide to collude and set the price of ingot at the monopoly level.

Requirement Is the price-fixing plan likely to be successful? Why or why not? Be specific.

Price: $13.1

Solution: The downloadable solution consists of 5 pages, 810 words.
Deliverable: Word Document