Tutorial exercise 9: Optimal output and shut-down condition
Suppose an airline’s fixed cost of serving a particular
route market is $5000. The demand curve in
this market is P(Q) = 100
0.2Q where Q stands for number of passengers. When a uniform price
is charged, the marginal revenue will be MR(Q) = 100-0.4Q. The marginal cost of operating flights
in the market is $50 per passenger and the total cost is C(Q) = 5000 + 50Q.
How many passengers should be served to maximize profit from operating in this market?
At the optimal output level, how much will be the variable cost, total cost and profit (or