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

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?

marginal cost (on a per passenger basis) is MC= $20
P = 120 – 0.1Q

revenue = (120 – 0.1Q)Q = 12Q -0.1Q^2

MR=120 ----- 2 (0.1Q) =120 -0.2Q
MC=MR

120 -0.2Q =20

Q=500

P= 120---0.1(500) =70
====================
PROFIT = PxQ ------ 20 Q
= 70 X500 -----20X500
=35000-10,000
Profit=25000 dollars

using five flights
Profit = $25,000

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