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Blue Skles Aviation is a manufacturer of small single-engine alrplanes. The company is relatively small and prides itself on being the enly manufacturer of customized airplanes. The company's high standard of quality is attributed to its refusal to purchase engines from mutside vendors, and it preserves its competitive advantage by refusing to sell engines to competitors. To achleve maximum efficiencies, the company has organızed Itself into two divisions: a division that manufactures engines and a division that manufactures irplane bodles and assembles airplanes. Consultants have estimated that Demand for Blue Skles' customized planes Is given by P- 740,000 - 2,0000 The cost of producing engines is CQ-6,0000 and he cost of assembling airplanes is C9- 36,0000 What problems would occur If the managers of each division were given Incentives to maximize each division's profit separately?

Blue Skles Aviation is a manufacturer of small single-engine alrplanes. The company is relatively small and prides itself on being the enly manufacturer of customized airplanes. The company's high standard of quality is attributed to its refusal to purchase engines from mutside vendors, and it preserves its competitive advantage by refusing to sell engines to competitors. To achleve maximum efficiencies, the company has organızed Itself into two divisions: a division that manufactures engines and a division that manufactures irplane bodles and assembles airplanes. Consultants have estimated that Demand for Blue Skles' customized planes Is given by P- 740,000 - 2,0000 The cost of producing engines is CQ-6,0000 and he cost of assembling airplanes is C9- 36,0000 What problems would occur If the managers of each division were given Incentives to maximize each division's profit separately?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Problem 11-17 (algo) Blue Skles Avlation is a manufacturer of small single-engine alrplanes. The company is relatively small and prides itself on being the only manufacturer of customized airplanes. The company's high standard of quality is attributed to Its refusal to purchase engines from outside vendors, and Iit preserves Its competitive advantage by refusing to sell engines to competitors. To achileve maximum efficiencies, the company has organized Itself Into two divisions: a division that manufactures engines and a dvision that manufactures alrplane bodles and assembles alirplanes. Consultants have estimated that Demand for Blue Skies' customized planes Is given by P-740,000 - 2,000Q The cost of producing engines is CelQ - 6,0000, and the cost of assembling alrplanes is C9- 36,000Q. What problems would occur if the managers of each division were given Incentives to maxtmize each division's profit separately? Lower profits due to double marginalization O Lower profits due to randomized pricing O Lower profits due to block pricing Lower profits due to price discrimination What price should the owners of Blue Skles set for engines In order to avoid this problem and maximize overall profits? $ 400000
Transcribed Image Text:Problem 11-17 (algo) Blue Skles Avlation is a manufacturer of small single-engine alrplanes. The company is relatively small and prides itself on being the only manufacturer of customized airplanes. The company's high standard of quality is attributed to Its refusal to purchase engines from outside vendors, and Iit preserves Its competitive advantage by refusing to sell engines to competitors. To achileve maximum efficiencies, the company has organized Itself Into two divisions: a division that manufactures engines and a dvision that manufactures alrplane bodles and assembles alirplanes. Consultants have estimated that Demand for Blue Skies' customized planes Is given by P-740,000 - 2,000Q The cost of producing engines is CelQ - 6,0000, and the cost of assembling alrplanes is C9- 36,000Q. What problems would occur if the managers of each division were given Incentives to maxtmize each division's profit separately? Lower profits due to double marginalization O Lower profits due to randomized pricing O Lower profits due to block pricing Lower profits due to price discrimination What price should the owners of Blue Skles set for engines In order to avoid this problem and maximize overall profits? $ 400000
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