An established airline company is thinking of expanding its schedule to include a morning flight from
Columbus to Sioux Falls. The airline company already has various fixed costs; if the new flight is added,
then its share of the fixed costs would be recorded as $3,500. The variable cost of operating the flight
would be $2,000. Thus, the total cost of the flight would be recorded as $5,500. The total revenue from
the flight is expected to be $3,000. Would you recommend that the flight be added?
a. No, since the revenue ($3,000) is below the cost ($5,500).
b. No, since the addition to the company’s profit is very small and not worth the effort.
c. Yes, since the company’s profit increases by $1,000 (= $3,000 – $2,000).
d. Yes, since the company’s profit increases by $3,000.
e. Yes, since more flights are always better for the customers.


I think it is A, but I am considering C. Just want some clarification.

I would say C, since revenue > variable costs

So you just ignore fixed costs?

aren't those fixed costs just a redistribution of costs the company has to carry anyhow?

Total cost of the flight exceeds any revenue... so A?

But it's still a cost.

that's what I thought.

Honestly, question is worded pretty ambiguously, but if the fixed costs increased for an additional flight, I think that'd make them variable costs by definition? I think mike and brmv are right on this one.

In other words, fixed costs are always constant amount C. The fixed costs per flight changes because you have C/(number of flights), but the overall fixed cost doesn't change.

This post was edited by zackill4 on Oct 2 2013 11:18pm

Hmm. Makes sense. I guess I'll have go with C then.

Yeh yeh the "share" of the fixed cost is $3500, the fixed cost doesn't go up (hence the name) like I thought... Should stick to chemistry related threads

Can I just say, in the future with economics-related questions on whether you should undertake a project, you always need to ask yourself:

"What is the marginal net benefit?"

Just take the marginal benefit and subtract the marginal cost. In your case the fixed costs are already there so your marginal benefit = $3000, and your marginal cost = $2000 variable cost of flights.

Nets to $1000 which > $0 so you should choose C.

If you think this way you will never get it wrong, take it from a former economics tutor