Homework Assignment 1: American Airlines leases a 300-seat carrier to fly its da
ID: 1168209 • Letter: H
Question
Homework Assignment 1:
American Airlines leases a 300-seat carrier to fly its daily Dallas-Denver route. It recently lowered its ticket price from $240 to $200, and observed the following demand for seats by business and tourist-class passengers:
Price
Q (business)
Q (tourists)
Q(total)
Revenue (business)
Revenue (tourists)
Revenue (total)
240
90
10
200
130
50
The daily fixed costs of leasing aircrafts are as follows:
300 seats
$32,000
260 seats
$28,000
180 seats
$20,000
American’s service cost is $20 per passenger, regardless of the aircraft used.
1. How many passengers should American seek to carry on each flight to maximize
(i) its revenues?
(ii) its profits?
2. What prices should American charge if it is restricted to leasing 180-seat aircraft only?
3. What is the maximum profit will it make under the conditions in (2) above?
Price
Q (business)
Q (tourists)
Q(total)
Revenue (business)
Revenue (tourists)
Revenue (total)
240
90
10
200
130
50
Explanation / Answer
Note:
Revenue = P x Q
Total cost = fixed cost + variable cost, where variable cost = Q x $20
Profit = revenue - total cost
Price
Q (business)
Q (tourists)
Q(total)
Revenue (business)
Revenue (tourists)
Revenue (total)
240
90
10
100
21,600
2,400
24,000
200
130
50
180
26,000
10,000
36,000
(1)
(a) To maximize revenue, Airlines should carry 180 passengers (Since revenue is higher at $36,000) at price
(b) To maximzine profits also, Airline should carry 180 passengers (Since profit = $400).
[Note: This is calculated assuming the aircraft is a 300-seater for which demand information is available]
(2) For 180-seater aircraft, fixed costs = $20,000 & variable costs = $20 x 180 = $3,600
Total cost = $23,600
The demand data shows that for a price of $200, demand is 180. That is, at a price of $200, the aircraft will run full capacity.
(3) Profit = Revenue - cost
Revenue (From above table) = $36,000
Costs (Calculated in part (2)) = $23,600
So, Profit = $(36,000 - 23,600) = $12,400
Price
Q (business)
Q (tourists)
Q(total)
Revenue (business)
Revenue (tourists)
Revenue (total)
Fixed Costs Variable Costs Total Cost Profit240
90
10
100
21,600
2,400
24,000
32,000 2,000 34,000 - 10,000200
130
50
180
26,000
10,000
36,000
32,000 3,600 35,600 400Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.