This case study is meant for MBA (Week end) students only.
Managerial Economics – MBA 644
1. Most of Europe’s coal mines have closed down. There are still large reserves of coal available. Under what circumstances would you envisage businesses opening up coal mines and exploiting these resources? Your answer should include relevant economic concepts.
The answer to this question, however, is related to the case of the oil sands and the concept of the margin. Europe still has plenty of coal reserves: in some cases they are not easy to get to, but it is still possible to mine these reserves. The issue is whether it is economically viable or marginal benefit in terms of demand and supply principles to do so if all other factors remaining constant. In our opinion, the decline of the coal industry and the closure of so many mines were done on the grounds that the marginal cost of extracting coal was too expensive given the way the global market was changing. If the chances and degree of marginal utility in generating energy or electricity from coal rather than gas is quite high - let's say 10/10. Or an importation of coal from other places is made to be very much cheaper; the total utility - satisfaction gained for businesses opening up coal mines and exploiting these resources would be maximized. It is widely accepted, however, that the industry itself had gone a long way towards improving productivity and becomes more efficient. It could be that the world has now changed again and Europe will become a net importer of oil and gas as supplies start to decline and the continent will then be more reliant on gas supplies from other places. The very fact that oil prices have increased has made investment into this resource practical, so this and the developments in technology alter the relationship between the marginal cost of coal and the marginal revenue. The concept of the margin, therefore, is important in decision making. In this case, the...
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