Question

1.An airline is flying between two cities. The airline has the following costs associated with the flight:

Crew $4,000 Plane daily depreciation $2,000

Fuel $1,000 Plane daily insurance$ 2,000

Landing fee $ 1,000

The airline has an average of 40 passengers paying an average of $200 for this flight. Do you think the airline should be flying between the two cities? Evaluate from a short-run and long-run perspective.

Answer 1

A frim should operate in short run if it is covering all its variable costs. And in long run firm could only operate if it is covering all its costs( Fixed and variable )

Here Total revenue = 200 * 40 = 8000

Fixed cost = Crew salary + Deprecation + Insurance

= 4000 + 2000 + 2000 = 8000

Variable costs = Fuel + landing fee

= 1000 + 1000 = 2000.

In short run airline should operate because it is covering all its variable cost and some of fixed cost.

BUt firm can not operate in long run because total cost (10000) are higher than total revenue.

#Please rate positively...thank you