Question

After mining 9,273 tons of coal, Blue Sky Mining's managers note that the marginal cost of mining the next ton of coal would be \(\$ 40\) per ton. They also calculate that the user cost of mining that next ton of coal would be \(\$ 35 .\) If the market price of coal is \(\$ 72,\) should Blue Sky mine an additional ton of coal? a. Yes. b. No. c. More information is needed.

Short answer

b. No.

Step-by-step solution

Understand the Concepts Involved

To decide if Blue Sky Mining should mine an additional ton of coal, we need to consider both the marginal cost and the user cost. The marginal cost (MC) is the extra cost incurred from mining one additional ton, which is given as $40. The user cost represents the opportunity cost of depleting a non-renewable resource, given as $35. If the market price exceeds the combined marginal and user costs, mining is profitable.

Calculate the Total Cost of Mining an Additional Ton

Add the marginal cost and the user cost to find the total cost of mining one additional ton. This is calculated as follows:\[\text{Total Cost} = \text{Marginal Cost} + \text{User Cost} = 40 + 35 = \$75.\]

Compare the Total Cost to the Market Price

The market price of coal is $72. Compare this to the total cost of mining an additional ton ($75). If the total cost is greater than the market price, it is not profitable to mine an additional ton.

Make the Decision

Since the total cost to mine an additional ton ($75) is greater than the market price ($72), it is not profitable for Blue Sky Mining to mine the additional ton of coal.

Key concepts

User Cost

The concept of user cost is a critical aspect when dealing with non-renewable resources like coal. It represents the opportunity cost associated with consuming a resource now rather than saving it for future use.
Imagine that you have a limited amount of something very valuable. If you use some of it today, you might not have enough left to use when you really need it tomorrow.
In the context of mining, user cost helps determine whether it's better to extract a ton of coal today or leave it in the ground.

• **Represents Future Value**: User cost considers how much value this resource might provide in the future if it's not used today.
• **Opportunity Cost**: It accounts for the potential loss of benefit from other uses of the resource.
• **Economic Decision-Making**: Mining companies use user cost to decide whether the short-term gain from extracting resources justifies the potential long-term losses.

Understanding user cost helps companies like Blue Sky Mining balance between immediate profit and sustainable resource management.

Opportunity Cost

Opportunity cost is a powerful concept in economics that involves considering the next best alternative when making a decision. It's about weighing what you're giving up in exchange for something else.
This concept comes into play when Blue Sky Mining calculates the cost associated with depleting its coal resources versus potential gains from other opportunities.

• **Choosing Between Options**: Opportunity cost requires you to think about what you sacrifice when you make a particular choice.
• **Non-Renewable Resources**: With resources like coal, the choice to extract it now versus later embodies opportunity cost.
• **Market Comparisons**: It helps companies decide if immediate gains from resource extraction balance out potential long-term costs or other market opportunities.

Ultimately, opportunity cost encourages businesses to use their resources in the most efficient way possible, avoiding decisions that could lead to greater potential losses.

Non-Renewable Resource Management

Non-renewable resource management is all about ensuring that resources like coal are used wisely and sustainably. It involves planning and decision-making related to the extraction and use of resources that can't be replenished quickly.
For companies like Blue Sky Mining, understanding how to manage these resources is crucial to long-term success.

• **Limited Availability**: Since non-renewable resources are finite, businesses must carefully consider how much and when to use them.
• **Economic Sustainability**: Proper management helps ensure a steady flow of resources and profits over time, rather than exhausting the resource quickly.
• **Environmental and Social Impact**: Beyond financial aspects, managing non-renewable resources also involves considering the impact on the environment and communities.

Through effective management, companies can reap benefits today while also safeguarding resources for future generations. This concept helps ensure that exploitation doesn't lead to depletion without forethought.