Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 23, Problem 10CQ
To determine

The difference between the new resort and airline businesses.

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Assume you are an engineer working for a chemical production company. You are on the technical team that is responsible for deciding what to do about the dangerous chemical that your company is using to produce its best-selling chemical product. Recent reports have just made known the dangers of this chemical, and the company now needs to decide how to proceed. There are several options to consider: stop producing the harmful product altogether and take a hit on total profits; continue to make the product and sell it, like nothing's wrong, since the federal government has not cracked down. You could also spend money and engineering efforts in R&D to develop a safe chemical that would take its place. There is no guarantee that this would happen any time soon, but the scientists think it is realistically possible. To make matters worse, your biggest competitor produces this harmful product off-shore and is not hampered by the US regulations. If you stop producing this product…
Your company has invested $5 million in developing a new product, but the development process isn’t quite complete. You have just learned from your marketing team that other companies have introduced similar products. As a result of this competition, the expected sales of your new product once you have completed development and actually begun production is now just $3 million. Your production team tells you that it will cost another $1 million to finish development and make your product. The decision is now yours: should you give the go-ahead to complete development of the product? Why or why not? In the event that your production team’s cost estimate is inaccurate, what is the most that your company should pay to complete development? Why? Be sure to incorporate (and define) the relevant concept into your answer.
A new business venture must develop a comprehensive business plan if it hopes to acquire start-up funding. Companies such as FedEx and Nike say they did not follow the original plan closely. Does that mean that developing the plan was a waste of time for these eventually successful companies?
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