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Explain why average-fixed-cost (AFC) declines as quantity increases. Use this concept to explain how high-density seating...

Explain why average-fixed-cost (AFC) declines as quantity increases. Use this concept to explain how high-density seating (more seats in the aircraft) lowers the cost per available seat mile (CASM) or cost per available seat kilometer (CASK).

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Answer #1

AFC = Total fixed cost (TFC) / Quantity (Q)

Since TFC remains constant over a specific (relevant) range of quantity, AFC decreases as Q increases.

CASM = Total cost (TC) / Number of seats (Q) = (TFC + TVC) / Q = AFC + AVC

Since AVC (Average variable cost) remains constant over a specific (relevant) range of quantity, the higher (lower) Q is, the lower (higher) the AFC, and the lower (higher) the CASM. Similarly,

CASK = Total cost (TC) / Number of seat-kilometers (Q) = (TFC + TVC) / Q = AFC + AVC

Since AVC (Average variable cost) remains constant over a specific (relevant) range of quantity, the higher (lower) Q is, the lower (higher) the AFC, and the lower (higher) the CASK.

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