23. HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane's operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of

23. HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane's operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Economic

lease anser a and b

23. HighFlyer Airlines wants to build new airplanes
with greatly increased cabin space. This will allow
HighFlyer Airlines to give passengers more comfort and
sell more tickets at a higher price. However, redesigning
the cabin means rethinking many other elements of the
airplane as well, like engine and luggage placement,
and the most efficient shape of the plane for moving
through the air. HighFlyer Airlines has developed a list
of possible methods to increase cabin space, along with
estimates of how these approaches would affect the
plane's operating costs and ticket sales. Based on these
estimates, Table 13.5 shows the value of R&D projects
that provide at least a certain private rate of return.
Column 1 = Private Rate of Return. Column 2 = Value
of R&D Projects that Return at Least the Private Rate of
Return to HighFlyer Airlines. Use the data to answer the
following questions.
Private Rate of Return
12%
10%
8%
6%
4%
Value of R&D
$100
$200
$300
$400
$500

Private Rate of Return
Table 13.5
12%
10%
8%
6%
4%
Value of R&D
$100
$200
$300
$400
$500
a. If the opportunity cost of financial capital for
HighFlyer Airlines is 6%, how much should the
firm invest in R&D?
b. Assume that the social rate of return for R&D
is an additional 2% on top of the private return;
that is, an R&D investment that had a 7% private
return to HighFlyer Airlines would have a 9%
social return. How much investment is socially
optimal at the 6% interest rate?

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