A major European auto maker decided to invest 45 billion euros to the construction of a new automated plant for the development and launching a new model of a SUV, expecting that it will bring additional sales of 60 billion euros The company has already invested 38 billion euros when the market research department uncovers that a major competitor is planning the introduction of a similar new model of SUV. They estimate that such an initiative by the major competitor auto maker will have a negative impact on initially projected additional sales of 30 billion euros. The auto makers’ management is trying to decide whether to continue investing in the new model or discontinue the project. You are hired by the auto maker as an economic consultant. You are required as an economist to help the company’s management make their decision:

a) At this point in time, what is the European’s auto makers marginal cost of introducing the new model of SUV? (5 marks)

b) What is the European’s auto makers’ marginal benefit from introducing the new model? (5 marks)

c) Will you advise the European auto maker to proceed with the completion of the new plant and introduction of the new model of SUV? Why or why not? (10 marks)

d) How do principles of economic thinking such as marginal benefit, marginal cost and opportunity cost will help you analyze the situation and make the right choice? (5 marks)

Answer rating: 100% (QA)

a The European auto makers marginal cost of introducing the new model of SUV is 7 billion euros whic... View the full answer