You own a small fleet of commuter airplanes which fly from Atlanta to Birmingham, Alabama. Each...

You own a small fleet of commuter airplanes which fly from Atlanta to Birmingham, Alabama.

Each roundtrip costs you an average of $3000 for the 300 mile trip (there and back). These costs include the costs of the pilot, aviation fuel, maintenance of the aircraft, depreciation of the aircraft, interest on the loan for the aircraft, annual license and registration fees for the aircraft and annual fees for the use of airport gates.

A corporation has offered you $2,000 for the 300 mile trip. Should you accept their offer? Do you have enough information above to make this decision? Explain why or why not.

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Expert Solution

The average cost of the 300 mile trip is $3000. The corporation here offers only $2000 for the mile trip. As the owner of the commuter airplanes, I would minize my cost to maximize my profits. Since, $2000 is less than my average cost i.e $3000 , I would reject the offer with this given information as I would make negative profits at this rate. But, this information is not enough to make my decision. Since, the capacity of the airplanes are not provided along with the informaton of fixed costs and variable costs. If $2000 per customer covers my fixed cost and it is greater than the minimum of average variable cost then I would accept the offer from the corporation.

Rahul Sunny answered 2 years ago

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