Question

Francisco. T he The Friendly Skies Airline Company runs a 100-passenger flight from Seattle to San t of running this trip is $13,900. (Therefore, the average cost per seat would be $13,900 divided by 100, or $139 per seat.) In addition, each passenger is handed a package of refreshments costing the airline $2 upon boarding the plane. Suppose that just in advance of a particular flight, one seat remains unfilled. Assuming the flight is going to be made no matter what the circumstances, what is the lowest possible price that the airline could charge for the remaining seat while still increasing its profit (or reducing its loss)? USE MARGINAL ANALYSIS and answer to the nearest dollar.

Answer 1

Lowest possible price is $2.

Since total cost of the trip is $13,900, this cost will remain unchanged even if one less passenger flies. This is not a relevant cost because this cost is fixed whether or not the aircraft flies fully-occupied or some vacant seats remain.

However, $2 is the marginal cost of providing refreshment when a passenger actually boards. Therefore this is a relevant, incremental cost which will be equal to the minimum chargeable price for the airline to minimize loss or maximize profit.