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An airline loses money on one of its routes but has decided to continue to provide...

An airline loses money on one of its routes but has decided to continue to provide service. Could this decision be economically rational in the short-run? In the long-run?

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Answer #1

Short run and Long run is a time period in the economics where the firm has fixed cost and variable cost and in long run all cost is variables.

In the above case, the airline is making loses in the short run where airline able recover fixed cost in the operating short run.

In long run, airlines company can make perfectly adjustment of the size, technological progress in reducing the cost and make the profit in the long run.

Thus it is the rational decision for the airline's company in short run operate losses situation when the loses equal fixed operating cost in other words airlines company able to recover fixed cost if unable to recover fix cost it is ration for the company to shut down.

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