Practice question · Multiple choice
An airline sells a last-minute seat for far less than the average cost per passenger and still improves its profit. How?
Hints
- The plane is flying whatever happens. Ask what the extra passenger actually adds to the airline's costs.
- Which cost should the decision compare against: average or marginal?
Show the answer
B. Because the flight's costs are almost entirely fixed and sunk
Why
The plane, crew and gate are paid for whether the seat flies empty or full, so the only cost in play is the marginal one, and anything above it is money that would otherwise not exist. Deciding on average cost would leave the seat empty, which is why pricing questions must always ask marginal to what?
Practise Cost Structures
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