5. As the exclusive carrier on a local air route, a regional airline must determ

Question

5. As the exclusive carrier on a local air route, a regional airline must determine the number of flights it will provide per week and the fare it will charge. The estimated cost per flight is $2,000. It expects to fly full flights (100 passengers), so marginal cost (on a per passenger basis) is $20.. The airline’s estimated demand curve is P = 120 – 0.1Q, where P is the fare in dollars and Q is the number of passengers per week
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a. What is the airline’s profit maximizing fare? How many passengers does it carry per week, using how many flights? What is its weekly profit?

b. Suppose the airline is offered $4000 per week to haul freight along the route for a local firm. This will mean replacing one of the weekly passenger flights with a freight flight (at the same operating cost). Should the airline carry freight for the local firm? Explain

Explanation / Answer

-MC = $20 -P = 120 – 0.1Q -Revenue = (120 – 0.1Q)Q = 120Q – 0.1Q2 -MR = 120 – 2 x (0.1Q) = 120 – 0.2Q -MC = MR -20 = 120 – 0.2Q -Q* = 500 -P* = 120 – 0.1(500) = 120 – 50 -P* = 70 -Profit = (P*)(Q*) – (20Q) -Profit = (70 x 500) – (20 x 500) -Profit = 35,000 – 10,000 -Profit = $25,000 -The profit maximizing fare is $70. The airline will carry 500 passengers per week using 5 flights, for a weekly profit of $25,000.

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