Question

According to Statistics Canada, due to an increase in supply, the average domestic airline fare decreased from $243.32 in 2014 to $240.60 in 2015, a decrease of $2.72. The number of passenger tickets sold in 2014 was 78.0 million and 79.5 million in 2015. Assume that over the same period, the airlines’ costs remained roughly the same. Can you determine precisely by how much producer surplus increased as a result of the $2.72 decrease in the average fare? If you cannot be precise, can you determine whether it was less than, or more than, a specific amount?

Answer 1

Producer surplus (PS) has increased. The calculation is as below:

Year 2014:

Suppose in 2014, the minimum acceptable price is $2.72.

Equilibrium price is $243.32 and quantity is 78 million.

PS = 0.5 × Difference in price × Equilibrium quantity

      = 0.5 × (243.32 – 2.72) × 78 million

    = 0.5 × $240.60 × 78 million

      = $9,383.40 million

Year 2015:

Since supply increases, suppose the minimum acceptable price becomes 0 by covering $2.72 price.

Equilibrium price is $240.60 and quantity is 79.5 million.

PS = 0.5 × Difference in price × Equilibrium quantity

      = 0.5 × (240.60 – 0) × 79.5 million

    = 0.5 × $240.60 × 79.5 million

      = $9,563.85 million

Note: 0.5 is the part of PS formula.

Therefore, PS increases in the year 2015.

Increase in PS = 9563.85 – 9383.40

                        = $180.45 million (Answer)

It is more than $9,383.40, the PS of 2014.