2. Understanding the role of fixed cost in the short run Aa Aa Consider an airli

Question

2. Understanding the role of fixed cost in the short run Aa Aa Consider an airline's decision about whether or not to cancel a particular flight that hasn't sold out. The following table provides data on the total cost of operating a 100-seat plane for various numbers of passengers. Total Cost (TC) 25,aa0 35,aa0 a,a00 43,a00 45,a00 46,a00 47,000 47,700 48,000 48,200 48,100 Number of Passengers 10 20 30 40 50 70 80 90 Given the information presented in the previous table, the fixed cost to operate this flight is At each ticket price, a different number of consumers will be willing to purchase tickets for this flight. Use the following demand schedule to complete the questions that follow Quantity Demanded (Tickets) (Dollars per ticket) S50 100 100 Assume that the price of a flight is fixed for the duration of ticket sales. Complete the following table by computing total revenue, total cost, variable cost, and economic profit for each of the prices listed. (Hint: Be sure to enter a minus sign before the number if the numeric value af an entry is negative.) Total Revenue Total Cost Variable Cost Profit (TC) (Dollars per ticket) 700 SS0 (TR P x Q) (TR TC) 100 Given this information, the profit-maximizing price is per ticket, and seats out of 100 will be purchased In this case, which of the following statements are true about the market at this price-quantity combination? Check all that The airline is operating at too big a loss and should, therefore, cancel this flight. Prarit is positive. Total revenue is greater than variable cost. Price is less than average total cost. If fixed cost decreases to $5,000, does this change the production decision of the airline in the short run? O Yes O No True or False: Operating a flight without full capacity should never happen in the short run, because it cannot be profitable O True O False

Explanation / Answer

Price TR TC VC Profits 700 0 25000 0 -25000 550 22000 45000 20000 -23000 200 12000 47000 2000 -35000 100 10000 48100 1100 -38100 Given this information, profit maximizing price is $550 and 40 seats out of 100 will be purchahsed. Req b: Revenue is greater than variable cost Req c: No. The Airline will continue to operate in the short run as the variable cost is fully recovered and revenue contribute some part towards recovery of fixed cost. Req d: False. The firm shall continue with the flight even if tit is below full capicity but at a profit maximisation or loss minization point.

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