1. Should airlines operate flights with emply seats? Read the Aplia-authored art

Question

1. Should airlines operate flights with emply seats?

Read the Aplia-authored article in the following scrollbox and then answer the subsequent question. Should I Stay, or Should I Go? In difficult financila times coupled with high gas prices, the airline industry is just one of the many facets of the U.S. economy that must come to grips with shrinking revenues and rising costs. The solution that many airlines have adopted is to simply cancel flights with low ridership. For example, in February 2011, Horizon Air decided to cancel the 5:30 PM flight from Pasco to Seattle and the 6:30 PM flight from Seattle to Pasco, because both flights are typically less than half full ("Horizon Air to Cut Flight from Pasco to Seattle," Josh Peterson, Associated Press, KAPPTV, Feb. 25, 2011). The economic question is whether or not this is actually profit maximizing in the short run. A novice econmist might prematurely think that it must be better for the airline to cancel a flight rather than to operate it with so many empty seats. Although this may be true in the long-run that is, when there are no fixed costs, so a long enough period of time where capital (such as planes) can be sold off, staff can be restructed, hubs can be reorganized, and so on---in the short run, all that matters is covering variable costs.

According to the previous Aplia-authored article, which of the following statements must be true regarding profit maximization in the short run? Check all that apply.

1. If It it is profitable for an airline to sell a positive quantity of tickets, the quantity where marginal revenue equals marginal cost is profit maximizing.

2. An airline should always shut down if economic profit is negative.

3. If total revenue is greater than total variable costs, the airline should sell a positive quantity of tickets.

Explanation / Answer

Profit Maximization in the short-run:

1. If it is profitable for an airline to sell a positive quantity of tickets, the quantity where marginal revenue equals marginal cost is profit maximizing. As this is the profit maximizing condition, this must be true in short run.

3. If total revenue is greater than total variable costs, the airline should sell a positive quantity of tickets. In this case, airlines may not be earning positive profit but they will be covering their variable cost. So, they must sell the positive quantity of tickets.

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