Answer to Question #120355 in Macroeconomics for sachin bedi

Question

If a plane has few empty seats before taking off, should airlines sell it below average cost?
Provide a suitable justification

Answer 1

Let us consider an airline deciding how much to charge passengers who will fly on it. Suppose that flying a 200 seat plane across the United Kingdom costs the airline $150,000. In this case, the average cost of each seat will be $150,000/200, which is $750. One might conclude that the airline should never sell a ticket for less than $750. The airline can find ways to raise its profits by thinking at the margin. If the plane is about to take off with ten empty seats and a standby passenger waiting at the gate will pay $850 for a seat. The airline will definitely sell the ticket. If the plane had empty seats, the cost of adding one more passenger is small. The average cost of flying a passenger is $750.Therefore the airlines should not sell the ticket below the average cost.