Answer to Question #56989 in Microeconomics for Aiyappa

Question

. Big Bird Air is legally obligated to purchase 50 jet engine from ERUS at the end of two years at a price of $ 200000 per engine. Confident that it is protected from opportunism with this contract, Big Bird begins making aircraft bodies designed to fit ERUS’s engines. Due to unforeseen events in the aerospace industry, in the second year of the contract ERUS is in the brink of bankruptcy. It tells Big Bird that unless it increase the engine price to $300000, it will go bankrupt.

a. What is the first thing should the manager of Big Bird Air do?
b. How could this problem have been avoided?
c. Did the manager of Big Bird use the wrong method of acquiring inputs?

Answer 1

Big Bird Air is legally obligated to purchase 50 jet engine from ERUS at the end of two years at a price of $ 200000 per engine. It tells Big Bird that unless it increase the engine price to $300000, it will go bankrupt.
a. Firstly, the manager of Big Bird Air should take into consideration all the risks of the purchase.
b. This problem could have been avoided, if Big Bird fixed the price of the contract or predicted the change in price of the inputs.
c. It is possible, that the manager of Big Bird used the wrong method of acquiring inputs.