Analysis of Swissair's Profit Maximization and Macroeconomic Factors

This economics report analyzes the profit maximization behavior of Swissair, a monopoly jet company in Switzerland. It calculates costs, revenues, and profits to determine the profit-maximizing output and price, which are found to be $900 and 600 units, respectively. The report illustrates market failure due to deadweight loss and discusses government interventions to address it. Furthermore, it evaluates macroeconomic factors like GDP, business cycles, unemployment, and inflation, along with the impact of fiscal and monetary policies. The analysis includes the causes and costs of unemployment and inflation, and government policies to manage these phenomena. The report concludes with a comprehensive overview of the Swiss economy and the firm's operations within it.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

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Executive Summary
The report aims at analyzing and interpreting the profit maximization behavior of Swissair, a
monopoly Jet Company of the country Switzerland. To find out the profit maximization level
output and price, cost (Total Cost, Total Fixed Cost, Total Variable Cost, Average Cost, Average
Fixed Cost, Average Variable Cost and Marginal Cost), revenue (Total Revenue, Average
Revenue and Marginal Revenue) and profit calculation of the firm is done. On the basis of the
graph obtain by plotting Marginal Cost, Average Revenue and Marginal Revenue, profit
maximization price and output is obtain which are $900 and 600 units respectively. The profit
maximization behavior of the firm is also illustrated followed by a demonstration of market
failure which occurs due to the deadweight loss, diminishing social welfare. Several
interventions of the government that can remove the market failure of the Swissair are also
provided. Next, an evaluation of economic phenomenon of the country is done along with its
(GDP) Gross Domestic Product. An analysis of business cycle is carried out to find the effect it
has on the firm. Finally unemployment rate and inflation rate is determined. Comments are made
on the cost and cause of unemployment and inflation besides providing the government policies
to handle the phenomenon.

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Table of Contents
Introduction......................................................................................................................................3
Profit maximization behavior of a firm...........................................................................................4
Short-run and Long-run cost calculation.....................................................................................4
Profit Calculation of Swissair......................................................................................................5
Profit Maximization of Swissair..................................................................................................6
Explaining the firm’s Profit Maximization behavior...................................................................7
Cause of Market Failure..............................................................................................................8
Government intervention to address the market failure..............................................................9
Macroeconomic consideration and government policy.................................................................10
Effect of Business Cycles on the firms......................................................................................11
Unemployment and inflation scenario of Switzerland..............................................................13
Demand-pull and cost-push inflation.........................................................................................14
Fiscal policy...............................................................................................................................16
Monetary policy.........................................................................................................................18
Conclusion.....................................................................................................................................20
References......................................................................................................................................23

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Introduction
Each and every organization has many objectives that it aims to achieve. In general, it is
believed that all the business houses have the sole objective of earning lump sum profit but
actually it is not so. Besides pursuing the aim of earning maximum profit, a firm focuses on
increasing market share, sales maximization, creating customers, innovative activities, social
concern and so on. A firm’s basic economic objectives mainly includes the objective of profit
earning and other objectives which are vital for achieving high amount of profit (Ghamkhari, &
Mohsenian-Rad, 2013). Profit earned by a business is considered as the heart of any organization
in absence of which no firm can face and survive the stiff market competition (Wilburn, &
Wilburn, 2014). In addition to the primary aim of maximizing profit, a firm also focuses on
gaining popularity and attracting more consumers by offering quality product at reasonable
(Stefanović et al., 2015).
For any nation, government plays a vital role in helping the economy to reach its
optimum performance level and for this he has four primary macroeconomic objectives of
maintaining a high employment level, price stability, encouraging economic growth and trade
(Nepal & Jamasb, 2015). Besides these primary objectives, some other important objectives of
government include ensuring equal distribution of wealth and income, strengthening the labor
productivity as well as achieving thermal equilibrium (Égert, 2016).
The objective of this report is to understand the profit maximizing behavior of a
monopoly firm of Switzerland, Swissair, and also to evaluate a number of macro-economic
consideration (like Gross Domestic Product, Economic Growth, Business Cycle, Inflation and
Unemployment) and government policies (Fiscal Policy and Monetary Policy)

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The structure of this report consists of an initial analysis of the profit maximizing
behavior of the business, Swissair, by calculating costs, revenue and profit and then addressing
the government interventions undertaken for market failure. This analytical segment is followed
by interpretation and explanation of various macro-economic factors and government policies.
Finally a conclusion has been drawn based on the outcome of the report.
Profit maximization behavior of a firm
The term “profit maximization” can be defined as a process (Short run or Long run) that
helps a firm to determine its level of input, output and price which in turn leads to high level of
profit (Young & Makhija, 2014). Swissair, Jet Company of Switzerland is taken to calculate its
profit maximizing behavior.
Short-run and Long-run cost calculation
Table 1: Short and Long run cost of Swissair (in dollars)
Units
of
Output
(Q)
Total
Fixed
Cost
(TFC)
Total
Variable
Cost
(TVC)
Total
cost
(TC)
Average
Cost
(AC)
Average
Fixed
Cost
(AFC)
Average
Variable
Cost
(AVC)
Marginal
Cost
(MC)
0 500 0 500 - - 0 -
1 500 1000 1500 1500 500 1000 1500
2 500 1300 1800 900 250 650 300
3 500 1700 2200 733 166.6667 566.6667 400
4 500 2300 2800 700 125 575 600
5 500 3000 3500 700 100 600 700
6 500 3700 4200 700 83.33333 616.6667 700
7 500 5100 5600 800 71.42857 728.5714 1400

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8 500 6900 7400 925 62.5 862.5 1800
9 500 8765 9265 1029 55.55556 973.89 1865
10 500 10260 10760 1076 50 1026 1985
Source: (swiss.com, 2019)
Revenue Calculation of Swissair
Table 2: Price setting of Swissair (in dollars)
Units of
Output
(Q)
Price
(P)
Total
Revenue
(TR)
Average
Revenue
(AR)
Marginal
Revenue
(MR)
0 0 0 0 0
1 1200 1200 1200 1200
2 1100 2200 1100 1000
3 1000 3000 1000 800
4 900 3600 900 600
5 800 4000 800 400
6 700 4200 700 200
7 600 4200 600 0
8 500 4000 500 -200
9 400 3600 400 -400
10 300 3000 300 -600
Source: (archive, 2019)

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Profit Calculation of Swissair

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Table 3: Profit of Swissair
Units of Output
(Q)
Total Revenue
(TR)
Total Cost
(TC)
Profit
0 0 500 -500
1 1200 1500 -300
2 2200 1800 400
3 3000 2200 800
4 3600 2800 800
5 4000 3500 500
6 4200 4200 0
7 4200 5600 -1400
8 4000 7400 -3400
9 3600 9265 -5665
10 3000 10760 -7760
Source: Created by Author
Profit Maximization of Swissair
In case of monopoly firm, output at which profit maximization occurs is identified by
equating the Marginal Revenue (MR) of the firm with its Marginal Cost (MC). To understand the
firm’s profit maximization level of output, a graph is drawn which shows the Average Cost
(AC), Marginal Cost (MC), Average Revenue (AR) and Marginal Revenue (MR) of the chosen
firm respectively.

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Figure
1:
Average
Cost
(AC),
Marginal Cost (MC), Average Revenue (AR) and Marginal Revenue (MR)
Source: Created by the author
The graph depicts that the Marginal Cost (MC) and Marginal Revenue (MR) intersect
each other at the point where quantity is 4 units. This quantity is the profit maximizing output of
the firm. The price at the profit maximization level is $900 with MC and MR at 600 units
respectively.
Explaining the firm’s Profit Maximization behavior
A monopoly always has a tendency to create an entry barrier for the other firms to earn
long run supernormal profit. Companies outside the monopolistic industry may have a lack of
awareness about the large amount of profit that can be earned. Despite this, even if they come to
know about high profit earning condition then they try to enter the market of the industry. In this
situation, the monopoly firm will try to keep these companies out from the market by creating
high entry and exist barrier.
1 2 3 4 5 6 7 8 9 10
-1000
-500
0
500
1000
1500
2000
2500
AC MC AR MR
Quantity
AC, MC, AR ,MR

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A monopoly firm has the ability to control the supply of the product it is offering to the
customers. Hence it can take decision about the quantity of product it will trade. In addition of
having the power to take the product supply decision, it also has the capacity to influence its
demand. Although the monopoly can influence its product demand but it does not have a direct
control over it. This in turn leads to a choice for the monopoly industry. On one side it can set the
price of the commodity but then the firm must accept the quantity of its sales that the consumers
are ready to purchase at the set price. On the other side, if the firm wants to choose the level of
its sell then the price of the commodity will be dependent on the consumers’ paying capacity.
Cause of Market Failure
Market failure occurs when a firm fails to utilize its resources effectively. For monopoly
firm market failure occurs due to misuse of the power. In monopoly a specific price is set by the
firm for its commodity. The price set by the firm will be higher than the quantity of the
commodity offered to the consumers at the specified price. This high pricing structure is creating
a loss to the society, which is generally identified as the deadweight loss. It is worth mentioning
that the deadweight loss is actually a gain that is neither received by a consumer or a producer,
hence creating an overall inefficiency in the market leading to market failure (Bleda, & Del Rio,
2013).

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1 2 3 4 5 6 7 8 9 10
-1000
-500
0
500
1000
1500
2000
2500
MC AR MR
Qualtity
M C , A R a n d M R
Deadweight
Loss
Figure 2: Deadweight Loss
Source: Created by the author
In the figure above, it is found that the monopoly market is creating a deadweight loss to
the society and because of this deadweight loss, the combined surplus of producer and
consumers are quite less compared to competitive market. Thus instead of maximizing the
society’s welfare, it is creating a loss to the society (as shown in the graph) therefore leading to
market failure.
Government intervention to address the market failure
To overcome the market failure, government intervention is essential for uplifting the
society’s welfare and encourage economic fairness. In monopoly market, government regulate
the industry by adopting various tax policies, price regulation, preventing price discrimination,
help in the monopoly to operate as public enterprise and by adopting anti-monopoly policies and
laws. Sometimes government even takes the decision to break up the monopoly power of the

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organization. It encourages competition in the market by lowering the barriers to entry and
supporting new firms and companies to enter the market. The government also intervenes the
monopoly market by fixing the prices offered by the firm, encouraging mergers, joint ventures
and so on (Koopman, Mitchell & Thierer, 2014).
Macroeconomic consideration and government policy
One of the most reliable and universal sources for identifying the nature of growth and
strength of a nation over a specific period is known as Gross Domestic Product (GDP) (Stahel,
2016). Switzerland is regarded as one of the fastest-growing countries of the world. The per
capita GDP of Switzerland stands among one of the highest in the world and is considered a
prosperous economy with low levels of poverty. Since 2007, the economy has recorded vast
improvements in its GDP rates. The reason behind this is that it has a neutral political position
with meagre unemployment ratio and a modernised market structure. However, in the year 2008-
09, the economy faced troubles from the recession. However, due to a robust financial base, the
economy recorded faster improvements in the year 2010.
Table 4: GDP and growth of Indian 2005-2018
Year GDP ($billion) * GDP growth (%) **
2005 408.689 3.1
2006 430.921 4
2007 479.913 4.1
2008 534.363 2.2
2009 541.507 -2.2

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2010 583.783 3
2011 699.58 1.7
2012 668.044 1
2013 688.504 1.9
2014 709.183 2.4
2015 679.832 1.3
2016 670.181 1.6
2017 678.965 1.6
2018 705.501 2.5
Source: World Bank, World Development Indicators 2019
Author’s calculation
Effect of Business Cycles on the firms
Business cycle portrays different phases of economic activity. It depicts the variation in
the economy through a period of expansion and recession (Piore, 2017). Though the economy of
Switzerland is stable, still it had to face a negative growth rate of -2.2% in the year 2009. The
financial crisis of September 2008 harmed the financial treasury of the country. There was a
drastic fall in the growth rate. A slowdown in productivity characterised the business sector.
However, due to its strong financial background, the economy had an active phase of recovery.

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2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
-3
-2
-1
0
1
2
3
4
5
GDP
GDP
YEAR
GDP growth
Figure 3: Illustrating the GDP growth rate (2005-2018)
Source: Created by Author
For example, consider the market for automobiles, which is classified as a necessity
among the citizens of Switzerland. Automobile industry contributes to a significant part in the
GDP of the country. A sudden change or a variation in economic cycle significantly affects this
industry. During the recession, the business sector undergoes several changes. This variation
extends from a reduction in productivity to fall in income levels (Anagnostou, Panteladis &
Tsiapa, 2015). Rising unemployment and declining investments characterise this phase. During
this period, due to a fall in income, people demand fewer cars. As a result, productivity falls, and
there is inventory accumulation of vehicles. Hence, this leads to a fall in the prices of vehicles.
In contrast to this, a period of boom resembles a phase of higher productivity, greater
availability of job opportunities and income. This increase in revenue leads to a higher demand
for automobiles, leading to a rise in the price of cars. However, Switzerland is characterised by a
booming economy and have not faced a severe recessionary phase.

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Unemployment and inflation scenario of Switzerland
Unemployment and inflation rate are inversely related to one another, to be precise,
employment and inflation are positively correlated. When workers anticipate a rise in the price
level shortly, to consume a similar basket of goods, the demand for a raise in salary. Thus, an
increase in wage pushes them to work for extra hours with efficiency. Hence, in the short run,
there is full employment of resources (Smith, 2017). This contributes to higher productivity in
the firms, leading to a broader range of incomes. However, an increase in wages of labours leads
to higher cost of production. This induces firms to demand less labour, which creates
unemployment.
Switzerland is claimed to be a wealthy economy, with low rates of unemployment. It has
a skilled labour force that this country employees in its different sector. Low levels of
unemployment rates indicate the economy is stabilised, income is high, and there is full
utilisation of the available resources. CPI (Consumer Price Index) inflation are meagre for this
country (Worldbank.org, 2019). Hence, it does not face enormous challenges from the increasing
price level. Higher-income and low inflation rate shows that consumers’ expenditure and
demand for goods are high. This also indicates firms have positive incentives to increase their
output production (Cingano, 2014). As a result, the growth rate of the economy flourishes and
implies there is no cost of unemployment for the Swiss economy.
There are signs of positivity for companies producing automobiles in Switzerland. Low
unemployment rates imply higher income in the country. Citizens can afford cars with their
higher wages and thus, the demand for automobiles increases. This leads to a rise in the price of
vehicles. There is an increase in sales revenue of the firms manufacturing automobiles, and thus,
the production of cars rises, which promotes GDP growth (Friedrich, 2016). This prosperous

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economic scenery attracts both foreign and domestic investors for investment in the companies.
This further adds up to modernisation of the market and has a positive impact on the economy.
Demand-pull and cost-push inflation
Demand-pull and cost-push inflation are the two types of inflation that can occur in an
economy. Demand-pull inflation is a result of excess demand. That is, when the total demands of
the economy surpasses the aggregate supply (Battini, Boysen & Emde, 2013). This is a result of
high employment ratios and GDP growth rates. This increase in demand pushes the price level at
an extreme level and reduces the purchasing power of individuals. Whenever consumers expect
an increase in the price level, they tend to increase consumption in the current period, which is
another reason for the price surge.
Moreover, an increase in prices of goods lowers the rate of savings in the economy which hurts
the financial system of an economy. In contrast to this, inflation caused by the rise in factor or
input prices is known as cost-push inflation. Due to an increase in the cost of production, there is
a fall in aggregate supply in the economy. Demand remaining constant, the quantity of goods
falls; creating an excess demand situation in the country. As companies cannot maintain their
profit levels, they cut back on production levels. This also leads to a reduction in labour demand
by these firms, hence generating unemployment. Moreover, this increased cost burden is passed
onto the buyers leading to inflationary pressure in the economy (Hansen, 2016).
Now to examine the effects of these two types of inflationary pressure on the market,
consider the example of the automobile industry. Demand-pull inflation raises the current
demand for cars due to an expected increase in future prices. This situation raises the cost of
vehicles in the present scene. On the other hand, cost-push inflation raises the cost of
manufacturing cars. This is a result of an increase in the price of intermediate inputs used in car

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production. These higher costs generate lesser profits for the firms, which forces them to reduce
output levels. As a result, these costs are burdened upon buyers and reduce their urge to
purchasing cars.
Table 5: Unemployment and inflation rate of Switzerland, 2005-2018
Year Unemployment rate (%) Inflation rate (%)
2005 4.437 1.172
2006 4 1.06
2007 3.652 0.732
2008
3.35 2.426
2009
4.116 -0.48
2010
4.807 0.688
2011
4.408 0.231
2012
4.485 -0.693
2013
4.747 -0.217
2014
4.826 -0.013
2015
4.801 -1.144
2016
4.918 -0.435
2017
4.797 0.534
2018
4.883 0.936

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Source: World Bank, World Development Indicators 2019
Fiscal policy
The government uses fiscal policy to control the economic fluctuations of an economy.
The objective of the plan is to adjust aggregate demand and price level of the country. It uses the
tool, government spending and taxation to control the instability in the economy (Adrian &
Liang, 2016). Whenever there is a need to raise the overall demand of the country, the
government implements expansionary fiscal policy. To build market, it increases expenditure on
the production of final goods or reduces income tax rates. Corporate taxation is reduced to boost
investment and productivity in the country (Levinson, 2013). Reduction in income tax increases
the real income of the population resulting in to shifts in aggregate demand. However, the
implementation of contractionary fiscal policy has the opposite effect on the total demand curve
of the economy. In this case, the government increases tax both on individual and corporate
income. Due to this, there is a fall in real income of households, which forces them to reduce
consumption.
On the other hand, tax on firms reduces their profit levels. This lowers the level of
investment as the investors’ lose interest in the business. As a result, there is a fall in demand and
productivity.

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LRAS
AD*
AD’
Price
Real GDP
SRAS
P*
P’
Y’ Y*
E’
E*
Y”
AD”
E”
P”
Figure 4: Expansionary and contractionary fiscal policy
Source: Created by Author
The above chart illustrates both the expansionary and contractionary economic policy.
The horizontal axis measures the real GDP of the country, whereas the vertical axis captures
changes in the price level. Due to an expansionary policy, the AD curve shifts rightward
increasing demand. The AD’ shifts to AD*, increasing both output and price to Y* and P*
respectively. Y* and P* are the long-run equilibrium of aggregate demand and supply, where
both long-run and short-run supply curve intersects (Kirchgassner, 2013). This shift in the
equilibrium point boosts productivity, employment and the price level. As a whole, this has a
positive impact on the GDP of the economy.

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Moreover, the increased income of the household rises their consumption spending. On
the other hand, an increase in taxes and low government spending shifts the AD” to AD*. This
reduces the level of GDP to Y* and lowers the high price to P*. Thus, it can be seen that P* and
Y* is the stable equilibrium. This contractionary policy reduces consumer spending on products
because of which productivity gets affected. This can lead to a fall in labour demanded by
companies, as a higher tax reduces profit levels of firms (Corsetti et al., 2013). As a result, there
is a negative impact on the unemployment level.
The automobile industry is positively affected by an expansionary policy. An increase in
consumer spending hikes the sales revenue of this industry (Auerbach & Gorodnichenko, 2013).
This sudden change in demand pushes the price level of the cars, as in the current situation, there
is excess demand in the economy. To produce more output to fulfil the excess need, the
company hires individual (Heo, 2016). This creates employment in the country; hence,
considering the entire situation, this policy has a constructive impact on the automotive industry.
On the other hand, a contractionary policy serves as a discouragement to the entire
industry. As this policy reduces demand, inventory accumulation rises, and this surplus stock
minimises the price of cars. However, lower investments reduce business confidence among the
shareholders (Smets, 2014). Except for a drop in the price level, the economy gets affected by
unemployment. As a result, there is a fall in productivity in the automobile industry.
Monetary policy
As per the reports of the Swiss National Bank (SNB), Switzerland has healthy public
finances, and their ultimate motive is to maintain stability in the economy. As their political
stance is neutral and espouses cultural balance, they are bestowed with a stable economy. An
increase in the money supply increases the aggregate demand (Snb.ch, 2019). On the other hand,

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a decrease in the money supply reduces aggregate demand. An expansionary policy increases
buyers’ purchasing power that induces them to demand more. Whereas, a contractionary system
of the SND can reduce consumer spending on goods, which can affect productivity.
On the other hand, a contractionary policy reduces consumer spending and productivity
levels. As a result, the level of employment, as well as the income of the population, gets
affected (Smets, 2014). The diagram mentioned below illustrates the shifts in AD curves due to a
change in the money supply. An increase in the money supply rises consumer spending, which
shifts the AD' to AD*. This leads to a rise in output and price to Y* and P* respectively. This
automobile industry is highly privileged with the implementation of this policy. This raises the
demand for cars and boosts their sales revenue. This acts as an incentive for the firms to raise
their price level. Employment in the industry increases the income of households in the country.
On the other hand, a reduction in money supply reduces demand for goods and shifts the
curve from AD" to AD*. This reduces the number of products to Y*and an equal level of decline
in prices to P*. The demand for cars reduces, which reduces the sales of the automobile
manufacturing industry. This leads to a fall in productivity and a reduction in employment in the
country. However, Switzerland employs highly educated labour. This country was able to fight
back both the financial and economic crisis effectively. This is because of its comprehensive
assets and credible monetary policy.

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LRAS
AD*
AD’
Price
Real GDP
SRAS
P*
P’
Y’ Y*
E’
E*
Y”
AD”
E”
P”
Fi
gure 5: Expansionary and contractionary monetary policy
Source: Created by Author
Conclusion
To conclude, this can be said that this paper focuses on the economic indicators of the
economy. This analysis is performed over the macroeconomic context of Switzerland. This paper
begins by examining the monopoly behavior of a firm. It focuses on the profit maximizing
decisions of the monopoly firm. Further, it discusses the market inefficiencies created by a
monopolist organization and suggests various government initiatives that can reduce these
inefficiencies. Moreover, it includes the trend of growth in Switzerland over a while of 2005-
2018. Examining this it detects the period of recession, boom and recovery of the concerned
country and specifies their respective impacts on the economy. This paper also signifies the

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relationship between inflation and unemployment and notifies their plausible effect on the
growth of the country. These effects are vividly injected on the market for automobiles and
analyses the displacements of the factors. In addition to the elements, government policies are
taken into account. This report studies the effects of fiscal and monetary policies on the demand
of the household for goods, industry growth and price level.

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