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

ID: 1225074 • Letter: U

Question

Understanding the role of fixed cost in the short run

Aa Aa 2. Understanding the role of fixed cost in the short run Consider an airline's decision about whether Dr 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. ber of Total Cost Passengers (TC) 35.000 55.000 20 65,000 67,000 68,000 68,500 69,000 60 70,000 70,500 80 70,800 90 70,900 Given the information presented in the previous table, the fixed cost to operate this flight is $35,000 At each ticket price, a different number of consumers will be willing to purchase tickets for this fight. Use the following demand schedule to complete the that fallaw Price Quantity Demanded (Dollars per ticket) (Tickets) 450 150 100 Assume that the price of a flight is fixed for the duration of ticket sales. Complete the following table by computing total revenue, tatal cast, variable cost, and economic profit for each of the prices listed. (Hint: Be sure ta enter a minus sign before the number if the numeric value of an entry is negative.) Price Total Revel Total Cost Variable Cost Profit (Dollars per ticket) (TR P x Q) (TC) (VC) (TR Tc) 35,000 -35,000 800 12,000 450 36,000 150 15,000 100

Explanation / Answer

(1) Fixed cost is equal to TC when Q = 0, so Fixed cost (FC) = $35,000

(2) VC = TC - FC = TC - $35,000 and Profit = TR - TC. Therefore

PROFIT

800

35,000

-35,000

600

12,000

65,000

30,000

-53,000

450

36,000

70,500

35,500

-34,500

150

100

15,000

70,900

35,900

-55,900

(3) Profit-maximizing (in this case, Loss-minimizing) price is $450, and 80 seats will be purchased.

(4) Following are true:

- Price is less than average total cost (Since total revenue is less than total cost)

- Total revenue is greater than variable cost

(5) NO

In short run the airline will continue if total revenue exceeds variable cost. Increase in fixed cost does not change this decision.

(6) TRUE

At full-capacity (Q = 100), TR < TC and TR < VC, therefore this flight cannot be continued.