Question

9. Should airlines operate flights with empty seats? Aa Aa E Read the Aplia-authored article in the following scrollbox and then answer the subsequent question. Should I Stay, or Should I Go? By the Aplia Economics Content Team In difficult financial 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 Source: SXC.hu. 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 economist 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 restructured, hubs can be reorganized, and so on-in the short run, all that matters is covering variable costs. A firm maximizes economic profit when marginal revenue is equal to marginal cost. Recall 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. 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. If fixed costs are large enough, the airline should cancel its flight. An airline should always operate if economic profit is positive.

Answer 1

True statements regarding 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.

2. An airline should always operate if economic profit is positive

Explanation: An airline maximizes its revenue for a flight by knowing the quantity of tickets where marginal revenue (MR) equals marginal cost (MC). If the profit is positive at that quantity, the airline should continue to operate its flight in both the short run and the long run. But if profit is negative at that quantity, the airline needs to check whether total revenue exceeds variable cost in the short run. If this persists true, then it is better to operate the flight at a loss than not operate at all. Furthermore, in the short duration fixed costs do not play a role at all on the decision making of the profit-maximizing quantity and whether to operate or cancel flight.