Albatross Airlines has a monopoly on air travel between Peoria and Dubuque. If Albatross makes one trip

Question:

Albatross Airlines has a monopoly on air travel between Peoria and Dubuque. If Albatross makes one trip in each direction per day, the demand schedule for round trips is q = 160ˆ’2p, where q is the number of passengers per day. (Assume that nobody makes one-way trips.) There is an €œoverhead€ fixed cost of $2,000 per day that is necessary to fly the airplane regardless of the number of passengers. In addition, there is a marginal cost of $10 per passenger. Thus, total daily costs are $2, 000+10q if the plane flies at all.
(a) On the graph below, sketch and label the marginal revenue curve, and the average and marginal cost curves.

(b) Calculate the profit-maximizing price and quantity and total daily profits for Albatross Airlines. ___________.
(c) If the interest rate is 10% per year, how much would someone be willing to pay to own Albatross Airlines€™s monopoly on the Dubuque-Peoria route. (Assuming that demand and cost conditions remain unchanged forever.) ___________.
(d) If another firm with the same costs as Albatross Airlines were to enter the Dubuque-Peoria market and if the industry then became a Cournot duopoly, would the new entrant make a profit? ___________.
(e) Suppose that the throbbing night life in Peoria and Dubuque becomes widely known and in consequence the population of both places doubles. As a result, the demand for airplane trips between the two places doubles to become q = 320 ˆ’ 4p. Suppose that the original airplane had a capacity of 80 passengers. If AA must stick with this single plane and if no other airline enters the market, what price should it charge to maximize its output and how much profit would it make? ___________.
(f) Let us assume that the overhead costs per plane are constant regardless of the number of planes. If AA added a second plane with the same costs and capacity as the first plane, what price would it charge? ___________. How many tickets would it sell? ___________. How much would its profits be? ___________. If AA could prevent entry by another competitor, would it choose to add a second plane? ___________.
(g) Suppose that AA stuck with one plane and another firm entered the market with a plane of its own. If the second firm has the same cost function as the first and if the two firms act as Cournot oligopolists, what will be the price, __________, quantities, __________, and profits? __________.