Assume that an Indian firm is contacted by a multinational car company to produce brake systems. This
Question:
Assume that an Indian firm is contacted by a multinational car company to produce brake systems. This requires an initial specific investment of I from the Indian subcontractor and a variable cost c per braking system. The car company plans to buy n braking systems from the subcontractor at price p per braking system.
a. Looking from now, at what price, p = p 0 , the Indian subcontractor would break even?
b. Once the specific investment is made, at what price, p 1 , that the Indian subcontractor will be willing to produce the braking systems?
c. Which price is higher, p 0 or p 1 ? What is their difference?
d. Understanding this potential situation, will the Indian subcontractor make the initial investment?
Fundamentals of Thermodynamics
ISBN: 978-0471152323
6th edition
Authors: Richard E. Sonntag, Claus Borgnakke, Gordon J. Van Wylen