Suppose that flying a 200-seat plane across country costs the airline $100,000. Thus, the average cost of each sear is $500. A plane is about to take off with 10 empty seats. Astandby passenger is waiting at the gate willing to pay $300 for a seat. Should the airline sell it to him? Explain. Should the airline sell him the seat for $50? Explain
Of course the airline should sell the standby passenger a seat -- at whatever price the customer is willing to pay. His ticket price is simply additional revenue added on to the revenue the company has already collected from the other passengers. The additional passenger doesn't add to the airline's cost of flying this plane.
Thanks Ms. Sue
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To determine whether the airline should sell the seat to the standby passenger willing to pay $300, we need to compare the revenue gained from selling the seat to the cost of flying with 10 empty seats.
1. Calculate the revenue: If the airline sells the seat to the standby passenger for $300, the revenue gained will be $300.
2. Calculate the cost of flying with 10 empty seats: The average cost per seat is $500, so for 10 empty seats, the cost of flying with those empty seats is $500 * 10 = $5000.
Now let's analyze the two scenarios:
1. Selling the seat for $300: If the airline sells the seat to the standby passenger for $300, the revenue gained ($300) is greater than the cost of flying with 10 empty seats ($5000). Hence, it would be economically beneficial for the airline to sell the seat to the standby passenger for $300.
2. Selling the seat for $50: If the airline sells the seat for $50, the revenue gained ($50) is less than the cost of flying with 10 empty seats ($5000). Selling the seat at such a low price would result in more loss for the airline. Therefore, it would not be advisable for the airline to sell the seat for $50.
In summary, the airline should sell the seat to the standby passenger for $300 since it would generate more revenue than the cost associated with flying with 10 empty seats. However, selling the seat for $50 would result in even greater losses for the airline.