In 1971, Congress conducted hearings on emergency loan guarantee legislation for Lockheed Corporation, which was in the middle of a severe liquidity crisis due to losses on a number of military contracts. The loan guarantee was intended to allow the company to complete development of the L-1011 Tri-Star program (production of a new commercial aircraft).

a. One estimate of the average cost (in millions of dollars) per aircraft during the program was AC 100(TQ)-5=100/VTQ, where TQ denotes the total number of aircraft produced to date. What is the average cost of the first aircraft? The 2nd? The 49th? The 100th? For every doubling of cumulative output, by what percentage does average cost decline?

b. Based on extensive economic testimony, Congress agreed with Lockheed management's contention that the aircraft eventually would be profitable and granted a $250 million loan guarantee. Economic. experts estimated the break-even number of aircraft in a range between 200 (the company's view) and 400 (the skeptics' view). How would one go about making such an estimate?

c. Years later, having sold fewer than 200 aircraft, Lockheed publicly announced that it was abandoning the program. The day after the announcement, Lockheed's stock price rose 18 percent. What conclusions can one draw from this?