Economics Quiz and Notes
1.Barrick Gold owns the Bulyanhulu mine in Tanzania and the Karlgoolie mine in Australia. Table 1 reports information on selling prices and costs for the two mines. Barrick’s selling price of gold differs from the spot price as some production is sold through long-term contract and also owing to the company’s use of hedging. The “average cash cost”(average variable cost) includes operating cost, royalties, and taxes, while the “average cost” includes the cash cost as well as amortization.
(A)Suppose that the Bulyanhulu mine always produces at the scale where its marginal cost equals the selling price of gold. Its marginal cost curve, however, shifts with changes in electricity prices, wages, and other factors. Using the data from table 1, illustrate the shifts in Bulyanhulu’s marginal cost curve, the selling price, and profit-maximizing scale of production between 2002 and 2004.
(B)In 2003, Barrick continued to produce from the Bulyanhulu mine even though the selling price of gold, $366 per ounce, was less than its average production cost of $369 per ounce. Was this a mistake?
(C)Use Barrick’s 2004 data to compare the (i) short-run break even conditions for Bulyanhulu and Karlgoolie; and (ii) the long-run break even conditions for the two mines.
Table 1: Barrick Gold Bulyanhulu Karlgoolie 2002 2003 2004 2004
Production (thousand ounces) 356 314 350 444
Selling price ($ per ounce) 339 366 391 391
Average cash cost ($ per ounce) 198 246 284 234
Average cost ($ per ounce) 300 369 384 278
Source: Barrick Gold Corporation, Annual Reports
Q1 Answer
(A)
(B) No. It is still reasonable to continue production as the selling price $366 per ounce exceeds the average variable cost $246 per ounce. The average variable cost here is referring to the average cash cost.
(C) Assuming the average cash cost is the average variable cost, both the short-run and long-run breakeven prices at Karlgoolie are much lower than the Bulyanhulu.
(A)Suppose that the Bulyanhulu mine always produces at the scale where its marginal cost equals the selling price of gold. Its marginal cost curve, however, shifts with changes in electricity prices, wages, and other factors. Using the data from table 1, illustrate the shifts in Bulyanhulu’s marginal cost curve, the selling price, and profit-maximizing scale of production between 2002 and 2004.
(B)In 2003, Barrick continued to produce from the Bulyanhulu mine even though the selling price of gold, $366 per ounce, was less than its average production cost of $369 per ounce. Was this a mistake?
(C)Use Barrick’s 2004 data to compare the (i) short-run break even conditions for Bulyanhulu and Karlgoolie; and (ii) the long-run break even conditions for the two mines.
Table 1: Barrick Gold Bulyanhulu Karlgoolie 2002 2003 2004 2004
Production (thousand ounces) 356 314 350 444
Selling price ($ per ounce) 339 366 391 391
Average cash cost ($ per ounce) 198 246 284 234
Average cost ($ per ounce) 300 369 384 278
Source: Barrick Gold Corporation, Annual Reports
Q1 Answer
(A)
(B) No. It is still reasonable to continue production as the selling price $366 per ounce exceeds the average variable cost $246 per ounce. The average variable cost here is referring to the average cash cost.
(C) Assuming the average cash cost is the average variable cost, both the short-run and long-run breakeven prices at Karlgoolie are much lower than the Bulyanhulu.