Question

An airline has 100 seats to sell on a plane traveling from New York to Los Angeles. It sells its tickets for \(\$ 450\) each. At this price, 97 tickets are sold. Just as the plane is about to take off, a person without a ticket says he is willing to pay 150 dollar, but not one penny more, to buy a ticket on the plane. The additional cost of the additional passenger (to the airline)- that is, the marginal cost to the airline-is 100 dollar.Is it in the best interest of the airline to sell the person a ticket for 150 dollar? Explain your answer.

Short answer

Yes, it is in the best interest of the airline to sell the ticket because the price the person is willing to pay (150 dollars) is more than the marginal cost (100 dollars), meaning the airline can make a profit.

Step-by-step solution

Determine the marginal cost

The marginal cost, as given in the exercise, is the additional cost to the airline for carrying one more passenger. In this case, the marginal cost for one additional passenger is 100 dollars.

Compare the marginal cost with the price the person is willing to pay

The person is willing to pay 150 dollars for a ticket. This price is more than the marginal cost of 100 dollars to carry one more passenger.

Decide whether to sell or not to sell

Since the price the person is willing to pay (150 dollars) is more than the marginal cost (100 dollars), selling the extra ticket would bring an additional 50 dollars of profit to the airline. Therefore, it is in the best interest of the airline to sell the person a ticket for 150 dollars.

Key concepts

Economics Education

Understanding economics involves learning how various factors influence the market and the decisions made by individuals and businesses. Economics education encompasses concepts like supply and demand, opportunity costs, and marginal analysis, which are crucial for interpreting market scenarios. Marginal cost analysis, a significant component of this education, helps uncover the effectiveness of producing one additional unit of a good or service. It's an essential concept in economics because it aids businesses in determining their optimal level of production.

By scrutinizing the difference between additional costs incurred and the revenue generated from selling one more item, students learn how to identify the point at which businesses maximize profit. This concept is illustrated in the textbook exercise where the airline has to decide whether selling an extra ticket below the usual price but above the marginal cost is beneficial. Such practical examples help students to better grasp how theoretical concepts are applied in real-world decision-making.

Decision Making in Economics

Decision making in economics involves a systematic process of evaluating choices by comparing costs with benefits. It's pivotal for entities, be it individuals or businesses, to make informed decisions that will lead to the optimization of resources and profits. In the case of the airline company from the textbook exercise, decision making hinges on marginal cost analysis. The airline assesses whether the benefit (price offered by the passenger) exceeds the marginal cost of adding one more passenger.

This process embodies the essence of economic decision making—weighing incremental costs against incremental benefits to arrive at a decision that enhances profitability. Teaching students to use this framework equips them with skills to apply logical steps when confronted with economic choices, emphasizing the value of a solid economics education in real-life scenarios.

Price and Cost Comparison

Price and cost comparison is a fundamental activity in economics which requires the evaluation of the expenses of production versus the revenue generated from sales. In the airline example, we compare the marginal cost—the cost of adding one additional passenger, which is 100 dollars—to the price that this passenger is willing to pay, 150 dollars.

The concept revolves around identifying profitability by ascertaining whether revenue (price) outweighs cost. If the proposed price exceeds the marginal cost, the sale can lead to an increase in overall profit. Conversely, if price falls short of the marginal cost, the sale could lead to a loss. Students must learn to navigate such comparisons adeptly, as they are crucial for businesses when setting prices to ensure they cover costs and generate profit.

Exercise Improvement Advice

It is beneficial to include real-life examples, such as the airline scenario, to illustrate price-cost dynamics clearly, enhancing students' understanding of the principles involved in setting prices and determining profitability.