BE Assignment 1 - 4 Big Bird Air is legally obligated to purchase 50 jet engine from ERUS at the end of two years at a price of $ 200000 per engine

BE Assignment 1 - 4 Big Bird Air is legally obligated to...

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4. Big Bird Air is legally obligated to purchase 50 jet engine from ERUS at the end of two years at a price of $ 200000 per engine. Confident that it is protected from opportunism with this contract, Big Bird begins making aircraft bodies designed to fit ERUS’s engines. Due to unforeseen events in the aerospace industry, in the second year of the contract ERUS is in the brink of bankruptcy. It tells Big Bird that unless it increase the engine price to $300000, it will go bankrupt. a. What is the first thing should the manager of Big Bird Air do? b. How could this problem have been avoided? c. Did the manager of Big Bird use the wrong method of acquiring inputs? 1. Big Bird is experiencing a hold-up problem because of an incomplete contract; the contract did not specify what would happen if ERUS went belly-up. ERUS claims it will go bankrupt if Big Bird does not pay a price of $300,000 for the engines, in which case Big Bird will lose its specialized investment in aircraft bodies. The manager should verify that ERUS is indeed on the brink of bankruptcy. If not, Big Bird can take ERUS to court if ERUS does not honor the contract price. If ERUS is on the verge of bankruptcy, the
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