Question

If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and the marginal cost per passenger is $100, then it will be profitable for the airline to:_________
a. charge a stand-by passenger no less than the full fare of $500.
b. charge a stand-by passenger less than $100.
c. charge a stand-by passenger more than $500.
d. charge a stand-by passenger more than $100.
e. fill the seats at the last minute for any price.

Answer 1

Answer:

d. charge a stand-by passenger more than $100.

Explanation:

Marginal costs are compared with marginal revenue to determine if addition sale or production of an extra unit is viable. Marginal cost refers to the extra expense associated with an additional unit, while marginal revenue is the gain from the sale of an extra unit.  For a business to make profits, marginal revenue should be equal or exceed marginal cost.

For the airline company, the marginal cost of an extra passenger is $100. If the company is to benefits from the many vacant seats, it must sell an extra ticket at a price greater or equal to the marginal cost. The company must sell a ticket to any stand-by passenger for more than $100.