An airline is flying between two cities. The airline has the following costs associated with the flight:
What will be an ideal response?
Crew $4000 Plane daily depreciation $2000
Fuel 1000 Plane daily insurance 2000
Landing fee 1000
The airline has an average of 40 passengers paying an average of $200 for this flight. Do you think the airline should be flying between the two cities? Evaluate from a short-run perspective.
Yes, from a short-run perspective, the airline should make this flight between the two cities. The total variable costs are $6000 ($4000 + $1000 + $1000). The total revenue is $8000. Thus the flight covers total variable cost and leaves $2000 to apply against $4000 of total fixed cost. If the plane did not fly, the firm would lose the entire $4000 of total fixed cost.
The average variable costs are $150 per passenger ($6000/40 passengers). The price, or average revenue of $200, is greater than the average variable cost of $150. The airline received enough revenue to cover average variable costs and also $50 per passenger to offset fixed costs that average $100.
You might also like to view...
Which of the following ideas of Adam Smith has religious overtones?
A. Comparative advantage B. Aggregate demand C. Perfect competition D. Rational expectations E. Invisible hand
What is technological change?
What will be an ideal response?
If 10 units of a good are sold at a market price of $40 each, then
a. the value to some individual of the tenth unit of output is $40 b. the economy is efficient c. selling an 11th unit would be a Pareto improvement d. a side payment of $40 is needed to ensure that the good is produced e. the market must be perfectly competitive
One policy the government can use to remedy the effects of pollution caused by the production of a good is to
a. lower the price of the good b. create positive externalities to compensate for the negative ones c. levy a tax on each unit of the good produced d. create free riders e. increase the production of the polluting good