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Each day between 7.00 am and 8.00 pm, 14 shuttle flights between two cities take off. Each one-way flight costs the airline £10,000. The table below gives total passenger revenue for daily flights: Flight 1 2 3 4 5 6 7 8 9 Total revenue (£000) 20 42 66 88 108 128 146 162 178 190 202 210 218 224 10 11 12 13 14 After seeing the data, the chief executive of the airline stated that running all 14 flights would maximise profits, with revenue of £224,000 and costs of £140,000. Marginal analysis indicates that this is not an economically efficient solution. Explain why
Expert Solution
As per marginal analysis, profit is not maximized when revenue is maximized, instead, when marginal revenue (MR) equals marginal cost (MC), where
MR = Change in TR / Change in Q, and MC = 10,000.
From the table,
When Q = 11, MR = (202,000 - 190,000) / (11 - 10) = 12,000/1 = 12,000 > MC.
When Q = 12, MR = (210,000 - 202,000) / (10 - 9) = 8,000/1 = 8,000 < MC.
Therefore, profit0maximizing quantity is Q = 12.
If Q < 11, MR > MC, so there is marginal profit (= MR - MC), which can be increased and maximized by increasing output. If Q > 11, MR < MC, so there is marginal loss (= MC - MR), which can be decreased and minimized by decreasing output. So, profit is maximized when MR equals MC.
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