Question

A regional airline sells 200 tickets to New York City for an average price of $ 200 one way. Half of the people on the flight will purchase a meal for $6. The airline’s employee costs per flight include $500 each for the pilot and copilot, and $200 for each flight attendant. The law requires airlines to have at least one pilot, copilot, and flight attendant for each flight. Fuel for the flight is expected to cost $8000, and the cost of catering food is $1 for each item purchased.

1st attempt Part 1 (2.5 points) The airline earns $ in revenue from tickets and $ from in-flight purchases. If one flight attendant is staffed for the flight, the airline pays $ in fixed costs. If the airline has three flight attendants for the flight, the firm earns $ profit.

Part 2 (2.5 points) What happens to profit in each of the following scenarios, given the information in Part 1 above? Scenario Change in Profit 1. An unexpected fuel shortage results in an increase in the price of fuel for the foreseeable future. 2. A large conference is announced in New York, which results in an increase in demand for seats on flights to New York. 3. A competing airline opens a route, which increases the supply of flights to New York City. 4. The pilots' union negotiates higher wages for pilots and copilots.

Answer 1

If 200 tickets are sold, than the airline earns $200*200= $40000 one way revenue from tickets, from inflight purchases it earns, as half of the people will purchase a meal for $6, than 100 people × $6 = $ 600. The airline pays $9,300 in fixed costs plus variable as (500+500+200+8000+100) if one flight attendant is staffed for the flight. 100 is the catering food charge as 100 people purchase a meal. Fixed cost will only generally be the salary, fuel and meal may vary, If the airline has 3 flight attendants than cost will be $9700 and profit will be $30,900 (40600-9700).

The profit will reduce if fuel price increases as fuel consists of a major component of expenditure.

The profits will increase if a large conference is announced in New York, as price of the flight tickets will also rise due to increase in demand.

The profit will reduce if a competing airline also serves flights to New York City, as people would now buy tickets of both the airlines.

The profit will reduce if pilots ask for more wages if the cost is not passed onto the consumer, even if the cost is passed onto the consumer, the consumer might find it expensive thereby not buying the tickets, and reducing profit further.