The storied American aerospace company, McDonnell Douglas, designed a wide-bodied airliner in the mid-1980s called the MD-11. Research and development costs, plus other fixed costs related to simply building and assembling the plane, totaled $5 billion by the time the plane could be purchased by customers in the early 1990s (all dollar figures here are expressed in 2021 values). The marginal cost of making each plane was a constant $200 million (labor, parts, and other variable costs-and we assume for simplicity that MC was not rising).

(a) Think about the firm's situation when, several years into production, it had made and sold 125 MD- 11s. From the beginning of design to delivering airplane number 125 (i.e. Q = 125), what was average fixed cost? Average variable cost? Average total cost?

(b) What happened next may be an apocryphal story, but it goes like this: the CEO of a major US airline called up McDonnell Douglas and asked to buy 10 MD-11s at $210 million each. Why might McDonnell- Douglas have said no!"? Why might they have said yes!"? What should they have done? Short answers are fine. There's a hint on page 2 if you want one.