Question

2. Understanding the role of fixed cost in the short run Aa Aa Consider an airline's decision about whether or not to cancel a particular flight that hasn't sold out. The following table provides data on the total cost of operating a 100-seat plane for various numbers of passengers Number of Total Cost (TC) 25,000 35,000 40,000 43,000 45,000 46,000 47,000 47,700 48,000 48,200 48,100 Passengers 10 20 30 40 50 60 70 80 90 100 Given the information presented in the previous table, the total fixed cost to operate this flight is $25,000 At each ticket price, a different number of consumers will be willing to purchase tickets for this flight. Use the following demand schedule to complete the questions that follow: Price (Dollars per ticket) 700 550 200 100 Quantity Demanded (Tickets per flight) 40 60 100 Assume that the price of a flight is fixed for the duration of ticket sales. Complete the following table by computing total revenue, total cost, total variable cost, and profit for each of the prices listed. (Hint: Be sure to enter a minus sign before the number if the numeric value of an entry is negative.)

Answer 1

Fixed Cost is cost incurred by firm irrespective of volume of business activity. It means that some expenses will be made even if there is no business activity.

If we refer to the given table we find that at zero number of passengers, total cost of operating 100 seat plane is $25000. So, fixed cost is $25000.

Following Profit table is made by using the given information.

Price, P	Quantity demanded, Q	Total Revenue	Total Cost	Total Variable Cost	Profit
(Dollars per ticket)	Tickets per flight	TR, P*Q	TC	Total Cost-Fixed Cost	(TR-TC)
700	0	0	25000	0	-25000
550	40	22000	45000	20000	-23000
200	60	12000	47000	22000	-35000
100	100	10000	48100	23100	-38100

We find that there is a negative profit at every price level. Maximum profit is -$23000 at a price level of $550 per ticket. 40 tickets will be purchased.

In this case , which of the following are true about the market at price quantity combination?

1. Profit is positive

False, Profit is negative at every price level.

2. Price is less than Average Total Cost

True, It is evident from the following table.

Price, P	Quantity demanded, Q	Total Cost	Average Total Cost
(Dollars per ticket)	Tickets per flight	TC	ATC=TC/Q
700	0	25000
550	40	45000	1125
200	60	47000	783
100	100	48100	481

3. Total Revenue is greater than Total Variable Cost.

False, It is not true in every price level.

4. The Airline is operating at operating at too big a loss, and there should cancel this flight.

False, At a price of $550, total revenue is greater than total variable cost. It means that variable cost is recovered and some of the fixed cost is also recovered. Flight should not be cancelled in the short run.

It the total fixed cost increases to $43000, does this change the production decision of airlines in the short run.

No, at a price of $550, total revenue is greater than total variable cost. It means that variable cost is recovered and some of the fixed cost is also recovered. Flight should not be cancelled in the short run even if fixed cost is $43000.

The decision to operate a flight in the short run depends upon the relationship the total revenue and total variable cost.

True, it is independent of fixed cost.