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Chapter 7: Problem 7

The cost of flying a passenger plane from point \(A\) to point \(B\) is \(\$ 50,000 .\) The airline flies this route four times per day at 7 AM, 10 AM, 1 PM, and 4 PM. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full. Find the average cost per passenger for each flight. Suppose the airline hires you as a marketing consultant and wants to know which type of customer it should try to attract- the off-peak customer (the middle two flights) or the rush-hour customer (the first and last flights). What advice would you offer?

Short Answer

Expert verified
The average cost per passenger for each flight is approximately $277.78. The airline should try to attract off-peak customers, as attracting more passengers to the off-peak flights can decrease the average cost per customer and thus increase the profit.

Step by step solution

01

Calculate Total Cost Per Day

Firstly, calculate the total cost per day. As the airline flies this route four times per day at 7 AM, 10 AM, 1 PM, and 4 PM. And the cost for each flight is $50,000. So, total cost per day would be \( 4 * 50000 = $200,000.\)
02

Calculate Total Number of Passengers Per Day

Now, calculate the total number of passenger per day. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full, i.e. 120 per flight. Therefore, total passenger per day would be \( 2 * 240 + 2 * 120 = 720.\)
03

Calculate Average Cost Per Passenger

Then, calculate the average cost per passenger. This can be obtained by dividing the total cost per day by the total number of passengers per day. So, average cost per passenger would be \( $200,000 / 720 = $277.78\) approximately.
04

Give Advice to the Airline

From the calculation, it is shown that the second and third flights are more expensive (from the company perspective) because these flights are only half full. Therefore, attracting off-peak customers can decrease the average cost per customer. The more filled a flight is, the lower the average cost per customer will be. This can increase the profit of the airline.

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Most popular questions from this chapter

The short-run cost function of a company is given by the equation \(\mathrm{TC}=200+55 q\), where \(\mathrm{TC}\) is the total cost and \(q\) is the total quantity of output, both measured in thousands. a. What is the company's fixed cost? b. If the company produced 100,000 units of goods, what would be its average variable cost? c. What would be its marginal cost of production? d. What would be its average fixed cost? e. Suppose the company borrows money and expands its factory. Its fixed cost rises by \(\$ 50,000\), but its variable cost falls to \(\$ 45,000\) per 1000 units. The cost of interest ( \(i\) ) also enters into the equation. Each 1 -point increase in the interest rate raises costs by \(\$ 3000 .\) Write the new cost equation.

Suppose the long-run total cost function for an industry is given by the cubic equation \(\mathrm{TC}=\mathrm{a}+\mathrm{b} q+\mathrm{c} q^{2}+\mathrm{d} q^{3}\). Show (using calculus) that this total cost function is consistent with a U-shaped average cost curve for at least some values of \(a, b, c\), and \(d\).

A firm has a fixed production cost of \(\$ 5000\) and a constant marginal cost of production of \(\$ 500\) per unit produced. a. What is the firm's total cost function? Average cost? b. If the firm wanted to minimize the average total cost, would it choose to be very large or very small? Explain.

A chair manufacturer hires its assembly-line labor for \(\$ 30\) an hour and calculates that the rental cost of its machinery is \(\$ 15\) per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm is currently using 3 hours of labor for each hour of machine time, is it minimizing its costs of production? If so, why? If not, how can it improve the situation? Graphically illustrate the isoquant and the two isocost lines for the current combination of labor and capital and for the optimal combination of labor and capital.

Suppose that a paving company produces paved parking spaces \((q)\) using a fixed quantity of land \((T)\) and variable quantities of cement (C) and labor (L). The firm is currently paving 1000 parking spaces. The firm's cost of cement is \(\$ 4,000\) per acre covered, and its cost of labor is \(\$ 12 /\) hour. For the quantities of \(C\) and \(L\) that the firm has chosen, \(M P_{C}=50\) and \(M P_{L}=4\) a. Is this firm minimizing its cost of producing parking spaces? How do you know? b. If the firm is not cost-minimizing, how must it alter its choices of \(C\) and \(L\) in order to decrease cost?
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