Estimating Scale and Learning Economies for a Memory

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 are

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associated with production of Intel’s 27256 EPROM (a memory chip) in the mid 1980’s. The

third series LM was obtained externally from a consultant to the semiconductor industry.

Variable names are

AVC = unit variable costs of production

Q = monthly production levels

LM = an index of labor and material costs in related industries.

Use these data to estimate Intel’s average variable production cost function. Consider the impact

of 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 as

production was moved off-shore to the Philippines; ii) In September 1983, there was an

unspecified production “problem” which may have impacted costs; iii) The consultant,

mentioned above, claims that there may be a seasonal component which impacts production in

the months of June and December about equally.

a. Write down your best estimated average variable cost equation for the 27256 EPROM along

with 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 when

V=5000 and V=10000. You may assume the index LM=1