5. YUR Airline has a flight taking off in 10 minutes to Chicago. The plane is three-quarters full.
John, a businessman, has run up to the ticket counter looking for a flight to Chicago. He offers to pay $150 for a seat on the plane that takes off in 10 minutes.
The total cost of a seat on the plane is $300. However, the additional cost to add John to the flight is very low since the plane is already fully fueled - the additional cost is $1.50 for a drink John drinks on the flight, $5.50 for the magazine he takes with him when he leaves, and $1.00 for the bag of peanuts he eats.
YUR airlines refused to sell the seat to John.
Based on the marginal principle, did YUR airlines make a wise decision? Why or why not?
Marginal principle states that in order to maximise net benefits action should be taken up to the point that marginal benefits equals marginal costs. Therefore every additional unit should increase profit / benefits more than it increases cost.
John will now have to take another flight to Chicago, for which he may be willing to pay full price for. If YUR airlines sold him this ticket at $150, they could potentially lose an extra $150 in revenue for another flight for which he may pay $300 for.
The marginal cost of putting him on the flight would have been:
$1.50 for a
$5.50 for the magazine
$1.00 for the bag of peanuts
therefore the benefits of seating John on the plane would have resulted in an extra $142 revenue
The airline will have certain fixed costs regardless of whether John is on the plane or not, such as the pilots wage, stewardesses, and fuel. By adding John to the plane the only other consideration apart from the costs mentioned would be the increased weight of the plane for him and his baggage, which would use more fuel. Although in this case it is a very minor consideration.
I would say they did not make a wise decision as the benefits of seating John on the flight would have far outweighed the marginal costs, and as they other fixed costs would still be applied regardless, it would have been better for them to admit John on to the plane and recover extra marginal costs, than potentially lose the extra marginal revenue, and also possible a future customer in addition to that. It would be much more costly for an air line to have to schedule another plane a week, rather than put lower paying passengers into empty seats on existing planes, which would eliminate the need for additional flights in some cases.
3. A major storm in Florida has just destroyed this year's crop of oranges. The price of oranges will increase by 50%. Oranges are an input into the production of orange juice.
Describe what will happen to the equilibrium price and quantity of orange juice due to this increase in the price of oranges. (You do not need to calculate any figures or adjust the graph)
The increased costs of production will limit the quantity the supplier will be willing to supply at a given price. Therefore the supply curve will shift left. These increased costs of production will enforce the supplier to pass on this price rise in the form of higher prices to the consumer. The equilibrium will now be where the new supply meets demand, which will be at a lower equilibrium quantity. Demand will be impeded by the sudden price fluctuation, and will decrease. Therefore the demand curve will shift left due to the higher price. The equilibrium will shift again, to where the new demand meets the new supply, giving a new equilibrium price and quantity for the market.