Answer to Question #260187 in Macroeconomics for emu

Question

How would the decision be influenced by: (i) the firm's precarious financial position; (ii) the knowledge that the machinery is to be scrapped after the next production run.

Answer 1

I) Given that the firm has a serious financial situation at the moment, the decision they make could be one that leans more towards less financial expenditure so as not to make the situation worse, this would imply repairs and fixes of the current machinery to avoid worsening the current financial situation.

ii) If the machinery is to be scrapped after the next production run, then the firm's decision should be influenced by choosing an option that gives higher benefit and returns without necessarily considering the risk undergone. Therefore, if a new machinery would mean higher returns, profits, and overall benefits, it would be the go to decision considering that even if they repaired the existing one, it would still be scrapped after the next production run despite the repair costs incurred.