Question

Assume that only two airlines (Airline A and Airline B) are serving two cities (say London and Biarritz, a holiday resort in France). Airline’s A profit-maximizing output depends on

A. How many passengers it believes Airline A can fly. B. Cheaper tickers than Airline B
C. How many passengers it believes Airline B will fly. D. The cost of aircraft fuel

Answer 1

SINCE AS PER THE UESTION TWO AIRLINES COMPANYS ARE SUBSTITUTE WE CAN SAY THAT PROFIT OF AIRLINE A WILL MAXIMIZE DEPENDING ON COST OF AIRCRAFT FUEL. BECAUSE COST MINIMISATION WILL ENSURE PROFIT MAXIMIZATION.

ANSWER : (D) THE COST OF AIRCRAFT FUEL

OPTION A IS WRONG BECAUSE THE PASSENGERS BELIEVING IN A MAY SHIFT TO B IF B GIVES ANY DISCOUNT OF LOW COST TICKET.

OPTION B IS WRONG BECAUSE CHEAPER TICKET IN B WILL MAKE THE CONSUMERS MOVE TO B TO TAKE THE FLIGHT

OPTION C IS WRONG BECAUSE THE PASSENGERS BELIEVS IN B WILL GO FOR B AND SOME MAY MOVE TO A IF A REDUCES THE PRICE BUT IN THAT CASE REVENUE AS WELL AS PROFIT OF A WILL REDUCE.