Applied problem 12 from Thomas & Maurice, Chapter 2pp85
The world market for newly smelted primary aluminum (i.eexcluding scrap or recycled sources) recently experienced a period of rising inventories and falling prices. The Wall Street Journal reported that Russian smelter Rusal, the world's largest aluminum producer, expected primary aluminum ingot prices would need to fall even further before worldwide inventory accumulation could stabilize. Suppose the demand for primary aluminum can be represented by the equation Q = 124-
0.025P (Q is the annual worldwide quantity demanded in millions of metric tons of new
aluminum, P is the dollar price of new aluminum per ton)Further suppose the world supply of
aluminum is Q,=-50+0.025P (Q, is the annual worldwide quantity supplied in millions of
metric tons of new aluminum, P is the dollar price of new aluminum per ton)
a.
At the time of Rusal's concernprimary aluminum prices were relatively high at $3,600 per ton.
At this price, calculate the monthly rate of inventory growth in the global aluminum market
using the given demand and supply equations for the world aluminum marketb. Rusal believed the price of aluminum would fall because of the growing accumulation of inventories worldwideEvaluate Rusal's prediction by using the demand and supply equations provided to make a prediction about the movement of world aluminum price.
C.
Assuming that Rusal set the primary aluminum price at $3,600 per tonwhat are the economic
effects of the price set? Explain by comparing market equilibrium level