Problem 9—Estimating Scale and Learning Economies for a Memory Chip (Intel)

Problem 9—Estimating Scale and Learning Economies for a Memory Chip (Intel)The monthly data (1983:05-1984:10) on unit costs and production levels in the file intel.xls areassociated with production of Intel’s 27256 EPROM (a memory chip) in the mid 1980’s. Thethird series LM was obtained externally from a consultant to the semiconductor industry.Variable names areAVC = unit variable costs of productionQ = monthly production levelsLM = an index of labor and material costs in related industries.Use these data to estimate Intel’s average variable production cost function. Consider the impactof scale economies, learning economies and of labor and material costs on production costs.Several additional facts may be of use: i) In May 1983, there was a one month disruption asproduction was moved off-shore to the Philippines; ii) In September 1983, there was anunspecified production “problem” which may have impacted costs; iii) The consultant,mentioned above, claims that there may be a seasonal component which impacts production inthe months of June and December about equally.a. Write down your best estimated average variable cost equation for the 27256 EPROM alongwith the relevant statistics, diagnostics and the rationale for your choice.b. Using the equation you have chosen, calculate the predicted:(i) change in unit cost due to moving operations offshore;(ii) elasticity of unit costs due to learning and the extent of any scale economies;(iii) reduction in costs for each doubling of cumulative production volume;c, Draw a rough graph of the total variable, marginal and average variable cost curves whenV=5000 and V=10000. You may assume the index LM=1.