In the world market for copper, there are two types of copper mines: Type 1 (primarily
located in North America) and Type 2 (primarily located in Asia and South America). Each
type of mine incurs five “buckets” of costs: (1) direct materials; (2) energy inputs (such as
electricity and natural gas); (3) shipping; (4) production labor; and (5) production and
administrative overhead.
Direct materials, energy inputs, and shipping services are purchased in competitive spot
markets, and the total monthly costs that a firm incurs on these items vary in direct linear
proportion to the quantity of copper produced in the mine during that month. If a mine
produces no copper in a particular month, it incurs no direct materials, energy, or shipping
costs.
By contrast, the total monthly costs for production labor and overhead are volumeinsensitive: the levels of these costs do not vary with the volume of production in the mine.
Even if the mine temporarily suspended operations for a month (i.e., produced zero output in
that month), the mine would still incur the same total monthly cost for labor and overhead
that it would have incurred had the mine produced a positive volume of copper. Labor and
overhead costs would “go away” only if the mine was permanently shut down and withdrawn
from the industry.
Each type of mine has a capacity that dictates the maximum amount of copper that can be
produced in a given month. The firm can produce any volume of output in the mine, provided
that it does not exceed this capacity.
The table below shows the cost profiles of the two different types of mines, as well as their
capacities (expressed as tons of copper per month). It also shows the number of mines that
are on active or near-active status in the world market. All costs are expressed on an average
cost basis (i.e., per ton of copper produced). The average costs of labor and overhead indicate
what the per-ton costs would be if a mine produced at full capacity.
Mine Number
of active
or nearactive
mines
Direct
Materials
($ per
ton)
Energy
($ per
ton)
Shipping
($ per
ton)
Labor
($ per ton,
assuming
full
capacity
output)*
Overhead
($ per ton,
assuming
full
capacity
output)*
Capacity
of a mine
(tons per
month)
Type 1 50 250 300 50 450 100 60,000
Type 2 40 150 200 100 150 100 100,00
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