As the exclusive carrier on a local air route, a regional airline must determine the number of flights it will provide per week and the fare it will charge. The estimated cost per flight is $2,000. It expects to fly full flights (100 passengers), so marginal cost (on a per passenger basis) is $20.. The airline's estimated demand curve is P = 120 - 0.1Q, where P is the fare in dollars and Q is the number of passengers per week
a. What is the airline's profit maximizing fare? How many passengers does it carry per week, using how many flights? What is its weekly profit?
b. Suppose the airline is offered $4000 per week to haul freight along the route for a local firm. This will mean replacing one of the weekly passenger flights with a freight flight (at the same operating cost). Should the airline carry freight for the local firm? Explain