Question

The Coaster commuter train runs crowded trains (200 passengers per train-car) during peak rush-hour commute times, but the there are only 10 passengers per train-car during off-peak hours. A manager of the Coaster says that the cost of running a car for one trip is $50 regardless of the number of passengers onboard: Therefore, the manager says the per passenger cost is $0.25 during peak hours and $5 per passenger in off-peak hours. This implies the Coaster should discourage off-peak hour ridership. Is the manager correct in this assessment? Explain. Think about this in terms of the marginal cost of adding another passenger

Answer 1

The manager has analyzed in terms of the Average cost but not in terms of the marginal cost. The $50 is a fixed cost and will always be incurred no matter the time and number of passengers.

In peak hours, the average cost per passenger is $0.25. If an additional passenger travels, then the average cost comes down to $0.248 which is a negligible fall.

Hpwever if an additional passenger travels in off peak hours, the average cost come down to $4.54 which is an appreciable fall. As a result, instead of discouraging people to travel during off-peak hours, the train should encourage people to travel during off-peak hours so as to recover their cost of running the train.

Since the train needs to be run anyway, the $50 can be assumed to be a fixed sunk cost. So the more the passengers, the more easily the cost can be recovered. Since there are already too many passengers during peak hours, discouraging one to travel will not have too much of an effect. However, in off-peak hours, discouraging one to travel will mean lesser people to recover the cost. Instead if more people are encouraged to travel during off-peak hours, it will be better for the train in terms of marginal cost and marginal benefit.

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