Question

Airlines seek new ways to save on fuel as costs soar

  

Fuel is an​ airline's biggest single expense. In​ 2008, the cost of jet fuel rocketed. Airlines tried to switch to newer generation​ aircraft, which have more​ fuel-efficient engines.  

​Source:

The

New York

Times​,

June​ 11, 2008

Explain how an increase in the price of fuel changes an​ airline's total​ costs, average​ costs, and marginal cost.

When the cost of fuel​ increases, total fixed cost​ _______ and total variable cost​ _______.  

A.

​increases; increases

B.

​decreases; increases

C.

​increases; does not change

D.

does not​ change; increases

When the cost of fuel​ increases, total cost​ _______.

A.

increases

B.

does not change

C.

equals total variable cost

D.

decreases

When the cost of fuel​ increases, average fixed cost​ ______ and average variable cost.​ ______.  

A.

does not​ change; increases

B.

​increases; increases

C.

​increases; does not change

D.

​decreases; increases

When the cost of fuel​ increases, average total cost​ ______, and marginal cost​ ______.  

A.

does not​ change; does not change

B.

​increases; increases

C.

​increases; does not change

D.

does not​ change; increases

Answer 1

1 Option D does not change , increase.

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities. Even if the price of fuel increases the Fixed costs incurred by the airlines will remain the same.

Variable costs are defined as costs that go up or down depending upon the usage of the airplane. For example, as the aircraft usage hours increase, the variable cost will increase as well even though the cost per unit stays the same. For example, the more hours the airplane fly , the higher the total fuel cost will be.

2.Option A increases

Total Cost = Total Fixed Cost + Total Variable Cost

As mentioned above increase in fuel prices. Increase the variable cost . So, the variable component of Total Cost increases. As a result Total Cost also increases

3.Option A does not change , increases

Average Fixed Cost is average fixed cost is the fixed costs of production divided by the quantity of output produced.Since fixed cost does not change so, average fixed cost also remains same.

The average variable cost is the total variable cost per unit of output. This is found by dividing total variable cost by total output. Total variable cost is all the costs that vary with output, such as materials and labor and fuel etc . As the variable cost increases Average variable cost also increases.

4.Option B increases, increases

Average total cost is defined as the sum of all production costs divided by the quantity of output produced. It describes the cost per unit of output. As the total cost increases with the increase in price of fuel so, Average total cost also increases.

Marginal Cost is the cost of producing one additional unit of goods or service. It is the change in the opportunity cost when one additional unit is added for production. It is change in Total Cost. As total cost of airlines increases with increase in fuel price Marginal Cost also increases.