Answer to Question #140427 in Microeconomics for Annie

Question

Gold is produced in mines in all the continents of the World except Antarctica. South Africa dominated as the leading global gold producer in the 20th century, but China took the lead in 2007. When the price of gold rose dramatically in the late 1970s, many older mines were reopened and intensive exploration resulted in numerous substantial gold discoveries. Today the price of gold is about 18,800 rand per ounce. If mining had become unprofitable when the price of gold was about 6.400 rand an ounce (in current dollars), show in a figure what this implies about the shape of the short-run cost function for a competitive gold mining firm. Also show in your figure how an increase in the current market price of gold effects the amount of gold that the Competitive firm extracts and how the firm's equilibrium profit changes.

Answer 1

The short-run cost function for a competitive gold mining firm is upward-sloping, as further gold mining is more and more expensive. An increase in the current market price of gold will increase the amount of gold that the competitive firm extracts, and the firm's equilibrium profit will increase too.