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Managerial Economics

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The Air Force awarded a $93 billion (or more) contract to a group led by Lockheed, Boeing and General Dynamics to build th new fighter plane for the 21st century, the YF-22 Lightning 2. A group headed by Northrop and McDonnell Douglas, which had spent more than $1 billion on development for their alternative YF-23, lost out on the contract. It was explained that Lockheed group got the contract because their "quality for the price per plane was higher". He did not elaborate. In terms of the theory (consumer theory) did he mean (a) the Lockheed quality was higher? (b) the Lockheed price was lower? or (c) neither, what did he mean?

There is not enough information to answer the question. could be a) could be b) could be both a and b.

Now you know why I am confused. But what I orginially wrote was something the airforce did and when the Secretary of Defense explained briefly why Lockheed group got this contract is because the quality for the per plane was higher, He did not elaborate. Can you still help?

Im not sure I can help as an economist. But, I would suggest you fall back on first principals. Each plane has a marginal cost -- for now assume its simply the price of the plane, plus some probability that the plane will need to go into the shop for repairs. With each plane come a myriad of benefits. The benefits from each plane may be different. And DOD has notions of what the probability of repairs are and what the difference in benefits each plane provides.

Second, if you are still having trouble getting a grasp on the problem, try putting the problem in terms of something you can relate to (e.g., why dad bought the Caddy instead of the Buick. ) And finally be a good economist and don't be afraid to assume away the intractable parts of the problem.

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