Several decades ago, the British and French governments agreed to jointly produce the Concorde, a supersonic plane. After British taxpayers had spent £300 million (over $2 billion in terms of money today) to help develop the plane, the British government concluded that because this vast sum of money had been spent, any decision to cancel the plane was nonsensical and, consequently, the only reasonable decision was to finish the project. Does this reasoning make economic sense? Why or why not? (Incidentally, the plane was finished and flew for 27 years before it was retired in 2003.)
As a production manager, your job depends on your ability to minimize the cost of production. You hire a consulting firm, and its report suggests that you have plenty to worry about: The cost of capital is $200 per hour, the wage paid to your workers is $16 per hour, the marginal product of capital is 10 units per hour, and the marginal product of labor is 32 units per hour. What is the consulting firm going to recommend, and why?
