Summary 273- The full cost to the airline of a grounded plane includes explicit costs—
repair costs, overnight hangar costs, and the like. It also includes an
opportunity cost: the lost profit on any canceled flights. - The past profits and development costs are irrelevant. If the firm drops
the product, it recovers $2 million. If the firm continues the product, its
additional profit is 5 3 4 2.5 $1.5 million. Thus, the firm should
drop the product. - The related electronics products would exhibit economies of scope for
several reasons. First, they have many technological elements in common
(expertise in copier technology carries over to facsimile machines, for
example). They also have some common components (microchips).
Second, customers see the products as complementary. Thus, brand-
name allegiance gained in computers could carry over to telephone
equipment. Third, there are likely economies in joint advertising,
promotion, and distribution. (Toshiba’s sales force can pursue sales on
any or all of its products.) - The repair firm’s marginal revenue is MR 50 .4Q, and its marginal
cost is MC 30 .6Q. Setting MR equal to MC, we find Q 20. From
the price equation, P 50 (.2)(20) 46. In turn, profit is
920
990 70. The firm incurs a loss in the short run, but this is preferable
to shutting down (
270). It is earning a maximum contribution
toward overhead. In the long run, the firm should shut down unless
conditions improve.
APPENDIX TO CHAPTER 6
CHECK STATION
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