$1.$ Should airlines operate flights with empty seats?

Read the following article, which introduces the concept of profit maximization. Then answer the question that follows.

In the past when the economy experienced downturn and high gas prices, the solution that many airlines adopted was to simply cancel flights with low ridership. However, an article published on the Traveller website in $2016$ points out some of the reasons it hurts an airline to cancel flights that are not full $($Michael Gebicki, $$Why Do Planes Fly Empty?$$ Traveller.com, September $22,2016).$ So what does economics have to say about whether this strategy is profit maximizing in the short run?

A novice economist might prematurely think that it must be better for the airline to cancel a flight rather than to operate it with so many empty seats. Although this may be true in the long run$$that is$,$ when there is a long enough period of time where capital $($such as planes$)$ can be sold off, staff can be restructured, hubs can be reorganized, and so on so that there are no fixed costs$$in the short run, all that matters is covering variable costs. According to the article, $$Airlines do not typically have spare aircraft sitting around waiting to be deployed to fill in for one that is late. Nor do airlines have idle flight crew in case they$$re needed, and an extended delay might also push the designated flight crew beyond their regulated flying hours.$$ In other words, fixed costs are significant in the day$-$to$-$date operations of this industry.

A firm maximizes profit when marginal revenue is equal to marginal cost. Recall that marginal revenue $($MR$)$ is the additional revenue received from selling one more unit of a good, whereas marginal cost $($MC$)$ is the additional cost incurred from producing one more unit of a good. If MR$>$MC$,$ this means that profit will increase if production is increased. Moreover, if MC$>$MR$,$ then profit will rise if production is decreased. Therefore, profit is maximized when MR$=$MC$.$ For those familiar with calculus, you can clearly see this relationship in the math that follows. Profit is equal to total revenue minus total cost; therefore, profit is maximized when the first$-$order condition $($or derivative$)$ is equal to zero:

Profit$=$Total$$Revenue$$Total$$CostFirst$-$Order$$Condition$=$Marginal$$Revenue$$Marginal$$Cost$0=$Marginal$$Revenue$$Marginal$$CostMarginal$$Cost$=$Marginal$$Revenue

In the short run, marginal cost is determined by variable cost alone. This is because fixed costs are incurred no matter what $($even with zero production$),$ so if total revenue is greater than or equal to variable costs, the firm is better off producing a positive amount and losing some money in the form of fixed cost versus producing nothing and losing the entire sum of fixed cost. As a result, it might be optimal for a firm to operate at a loss in the short run, as long as revenue is sufficient to cover variable costs.

However, in the long run, all costs are variable, so marginal cost encompasses everything, and thus, profit must be greater than or equal to zero for a firm to stay in operation. Thus, although MR$=$MC$$is always the profit$-$maximizing condition, it doesn$$t necessarily ensure positive profit in the short run.

So$,$ how does all this relate to empty seats on an airline flight? In the short run, airlines have significant fixed costs$$that is$,$ costs they incur whether they actually make a flight or not: airplane equipment, contract agreements with airports, licensing fees, hangar space, and so forth. Once one passenger takes flight, the additional cost of the rest of the passengers is minimal: a slight increase in fuel, perhaps, due to additional weight, beverages, snacks, maintenance on the interior of the plane, staff, and so on$.$ Although the marginal cost of the first passenger is large, all additional passengers come at quite a low additional cost. Once enough passengers have purchased tickets, as long as the revenue received is larger than the variable cost of accommodating that many passengers, it makes sense from an economic standpoint to fly the plane with empty seats in the short run rather than canceling the flight.

In the long run, the airline should take measures to enable a healthy profit stream going forward, such as renegotiating flight patterns, altering the stock of planes, reworking gas contracts, and so forth. But from a short$-$run standpoint, fixed costs simply don$$t factor into the equation.

According to the article, which of the following statements must be true regarding profit maximization in the short run?$$Check all that apply.

An airline should always shut down if profit is negative.

If total revenue is greater than total variable costs, the airline should sell a positive quantity of tickets.

If fixed costs are large enough, the airline should cancel its flight.