Xerdak Inc. has a corporate jet, which it uses to fly managers from Rochester to Chicago.
The associated costs (monthly) of maintaining and flying the jet are as follows:
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Pilot:
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$10,000
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Depreciation:
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10,000
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Overhead:
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10,000
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In addition, each round trip to Chicago costs $10,000 in fuel. Commercial airlines (e.g., United) charge $600 for a round trip to Chicago. Managers consider the commercial service and the company service to be identical. The company plane flies a maximum of 20 times each month and has 50 seats. There are always more managers wanting to fly on the plane than there are seats. The company wants to buy some more planes. Unfortunately, they are back-ordered, and so the company will not be able to obtain additional capacity in the near future. According to economic theory, what is the optimal transfer price for a round trip to Chicago? Explain why.