Suppose Investa Inc. decided to invest 45 billion dollars in developing and laun

Question

Suppose Investa Inc. decided to invest 45 billion dollars in developing and launching a new model of its digital camera, expecting that it will bring additional sales of 60 billion dollars. The company has already invested 38 billion dollars when the marketing department suddenly finds out that the introduction of a similar camera by Sony will reduce Investa's expected additional sales to 30 billion dollars. The company's management is trying to decide whether to continue investing in the new product or close the project. Investa hires you as an economic consultant. So, think like an economist to help the company's management make their decision:

a) At this point in time, what is Investa's marginal cost of introducing the new product?
b) What is Investa's marginal benefit from introducing the new product?
c) Will you advise Investa to finish the project and introduce the new product? Why or why not? What principles of economic thinking will help you analyze the situation and make the right choice?

Explanation / Answer

A) MC = 45-38= $ 7

Bcoz 38$ investment is already done, so onlyv7$ is required to reach investment of 45$

B) MB = 30 bilion dollar, bcoz expected additional revenue is 60 billion & the competitor will introduce new product & it will cost the company a loss of 30 billion

C) since MB> MC, so new product should be invested,

So the principal is based on neo classical economics based on marginal revolution.

If Marginal revenue exceeds marginal cost of an investment, that should be undertaken till both are equalized.

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