SupplementalHandout_Ch1_DecisionMakingMa

SupplementalHandout_Ch1_DecisionMakingMa - Econ 2 / Penn...

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X-Tream ECONOMICS Harnessing the Power of Incentives RATIONALITY RULES Econ 2 / Penn State Prof. Misty Ann Stone Supplemental Handout Decision Making at the Margin Chapter 1 in Miller Answers to Exercises Exercises 1. Marginal Airlines runs 10 flights per day at a total cost of $50,000, including $30,000 in fixed costs for airport fees and the reservation system and $20,o00 for flight crews and food service. a. If an 11 th flight would have 25 passengers, each paying $1000, would it be sensible to run the flight? Yes. The $30,000 in fixed costs must be paid whether or not the 11 th flight goes or not. Thus the marginal cost of the 11 th flight is $20,000. If the 11 th flight had 25 passengers, each paying $1000, it would have revenue (marginal benefit) of $25,000. This is greater than the marginal cost of $20,000. b. If the 11 th flight would have only 15 passengers, would it be sensible to run the flight? No. The marginal cost is still $20,000. However, the marginal benefit is only
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SupplementalHandout_Ch1_DecisionMakingMa - Econ 2 / Penn...

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