Suppose an airline is losing money because they cannot fill enough seats in thei

Question

Suppose an airline is losing money because they cannot fill enough seats in their flights with passengers. The airline would offer a flight only if at least 70% of the seats could be filled. The average total cost for the typical flight is $12,600. Of this amount, $3,700 is the cost of the firm’s fixed inputs and $8,900 is the cost of its variables inputs. The average variable cost remains the same no matter how many flights are offered. The airline flies 60 seat jets and charges $300 per ticket. The market where the firm operates can be viewed as perfectly competitive.

a.What is the marginal revenue from a full flight?

b. If an airline offers a flight with 70% of its seats filled, by how much will it increase or decrease the losses?

Explanation / Answer

a.

The airline flies 60 seat jets and charges $300 per ticket.

Total Revenue from a full flight is = number of passenger* price of per ticket = 60*300=$18000

So marginal revenue from additional full flight is $18000

When full flight is made, average total cost is $12,600

So profit from full flight is = $5400

b.

When flight runs on 70% capacity.

Revenue is =60*70*300/100=$12600

Total cost of flight is = $12600

So, firm made neither any loss nor any profit in this scenario. From full flight scenario, flight makes loss of $5400.

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