Good Morning, I was hoping to get some guidance with an economics assignment. Please see below for
Question:
Good Morning,
I was hoping to get some guidance with an economics assignment. Please see below for the assignment question.
You are an executive at a major airline and were given the task to decrease the number of empty seats on flights. They are extremely interested in last minute tickets as way to decrease the number of empty seats. The COO informs you that the marginal cost of additional passenger is only the administrative costs of the additional person. She estimates this cost to be $10 per additional ticket. Currently, the airline sells last minute tickets at a 30 percent premium (roughly $700), and a typical flight they sell 2 to 3 last minute tickets. You have checked with the Federal Aviation Administration (FAA) to confirm no additional fuel load would be needed for additional passengers. However, the only time the last minute tickets will matter is if the airline has already decided to send the flight (i.e. canceled flight no last minute tickets). The COO only wants you to advise her on the price of a ticket, as they have tried EVERYTHING else.
What advice would you give the COO about the price of last minute tickets. What are the pros and cons of your plan? What are the pros and cons for the last minute passenger.
I believe that it would be best to offer a heavily discounted ticket as the marginal benefit of the price of the discounted ticket would be greater than the marginal cost of just allowing the airplane seat to go unused. Even if we were to sell tickets at a discount, as long as the discount is more than the additional cost of $10 per ticket, the airline would still receive money rather than no money coming in if no passenger purchases the seat.
The pros of an discounted ticket would allow the airline to decrease the number of empty seats as requested however the airline would take a price cut and possibly not receive a profit with the discount. Doing this could also discourage passengers from purchasing tickets ahead of time if they anticipate a discount down the line as a potential con.
The pros of an discounted ticket for the passenger would be money saved however a potential con would be the passenger being subjected to which ever seat is available; they would not have the comfort of being able to choose as if they would have purchased the ticket in advance.
Cornerstones of Financial and Managerial Accounting
ISBN: 978-1111879044
2nd edition
Authors: Rich, Jeff Jones, Dan Heitger, Maryanne Mowen, Don Hansen