Tutorial exercise 9: Optimal output and shut-down condition
Question 1
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.
a.
How many passengers should be served to maximize profit from operating in this market?

1
b.
At the optimal output level, how much will be the variable cost, total cost and profit (or