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British and French governments agreed to jointly produce the Concorde

Several decades ago, the British and French governments agreed to jointly produce the Concorde, a supersonic plane. After British taxpayers had spent £300 million (over $2 billion in terms of money today) to help develop the plane, the British government concluded that because this vast sum of money had been spent, any decision to cancel the plane was nonsensical and, consequently, the only reasonable decision was to finish the project. Does this reasoning make economic sense? Why or why not? (Incidentally, the plane was finished and flew for 27 years before it was retired in 2003.)
As a production manager, your job depends on your ability to minimize the cost of production. You hire a consulting firm, and its report suggests that you have plenty to worry about: The cost of capital is $200 per hour, the wage paid to your workers is $16 per hour, the marginal product of capital is 10 units per hour, and the marginal product of labor is 32 units per hour. What is the consulting firm going to recommend, and why?

Full Answer Section

Opportunity cost: Continuing with the Concorde meant neglecting other potential investments with higher returns. The £300 million could have been used for more beneficial projects, creating additional value for the economy.
Uncertainties: The future success of the Concorde was uncertain. Factors like oil prices, environmental regulations, and passenger demand could have negatively impacted its profitability.

In 2003, the Concorde's retirement confirmed the economic concerns. Its high operating costs, sonic boom issues, and limited passenger capacity made it unsustainable in the long run. Production Manager and Consulting Firm Advice The consulting firm is likely to recommend increasing the use of labor and reducing the use of capital. Here's why:

Marginal analysis: The marginal product of labor (32 units/hour) is significantly higher than the marginal product of capital (10 units/hour) per cost ($16 vs. $200). This means each additional unit of labor adds more value to production than each additional unit of capital.
Cost minimization: By substituting labor for capital, the production manager can achieve the same output at a lower cost. This leads to increased efficiency and profitability.
Practical considerations: Depending on the production process, increasing labor might be easier to implement than adjusting capital investments.

However, the consulting firm will likely offer more nuanced recommendations considering various factors:

Production constraints: There might be limitations on the available workforce or limitations on certain tasks that only specific capital equipment can perform.
Long-term planning: While substituting labor for capital might be efficient in the short term, long-term plans might require different capital investments for expansion or automation.
Employee welfare and working conditions: Increasing labor use should not compromise employee wellbeing or safety.

Therefore, the consulting firm's advice will likely go beyond a simple substitution and provide a tailored approach based on the specific production context and long-term objectives.

Sample Answer

No, the British government's reasoning did not make economic sense. This is an example of the sunk cost fallacy, where past expenditures influence current decisions regardless of their relevance to future outcomes. The £300 million already spent on developing the Concorde did not justify continuing the project if it wasn't economically viable.

Here's why:

Future costs matter: Focusing only on past costs ignores the future costs of completing and operating the Concorde. If those costs were larger than the potential benefits (e.g., revenue, prestige), finishing the project would be a bad decision regardless of past investments.