Avianca Offers Free Tickets to Stranded Spirits Airlines Passengers

Answer the following questions to check your understanding of the story.

What is the marginal revenue of providing a seat at a zero ticket price?

a) Negative

b) Cannot be determined

c) Zero

d) MR is less than the P

Wrong! - Selling an additional seat at zero price keeps the total revenue unchanged, so MR is not negative. MR is equal to zero when P is zero. MR is clearly determined as zero.

Well Done! - When a seat is sold at a zero ticket price, no additional revenue is generated from that passenger.

What is the marginal cost of providing an empty seat on an already scheduled flight?

a) Very high

b) MC is equal to ATC

c) Negligible (almost zero)

d) It cannot be determined whether it is high or low

Wrong! - Very few extra resources are required, so marginal cost is not very high. MC is only the cost of one extra passenger, and much lower than ATC for an already scheduled flight. MC of an empty seat is known for a flight that is already scheduled.

Good Job! - Most flight costs are fixed. An extra passenger adds a very small variable cost such as food, so marginal cost is negligible.

How does Avianca’s profit change when empty seats are offered for free?

a) Doesn’t change much

b) Decreases significant

c) Cannot be determined whether the effect is significant or insignificant.

d) Increases significantly

Wrong! - Profit does not decrease significantly because the airline does not incur substantial additional cost. Profit does not increase because no ticket revenue is earned from free seats. The effect is insignificant which can be confirmed by performing marginal analysis of empty seats sold.

That's Right! - Since MR is zero and MC is negligible for an extra passenger, the profit/loss from each empty seat is negligible, so total profit remains almost unchanged.

Why does Avianca offer seats at a zero price?

a) To capture consumer surplus

b) To increase future demand

c) Doing so is very profitable

d) To increase total revenue from the flight

Wrong! - Since MR is zero and MC is negligible, increasing profit is not the reason why Avianca offers free seats. Free seats do not increase total revenue. Consumer surplus cannot be captured by an airline when ticket price is zero.

Correct! - Capturing customers of a discontinued airline increases Avianca’s future demand.

Is Avianca’s decision to offer free seats in self-interest social interest?

Avianca’s decision is ___________.

a) both in the self-interest and the social interest

b) in the social interest but not in the self interest

c) neither in the social interest nor in the self interest

d) in the self-interest but not in the social interest

Wrong! - Avianca’s decision is in the social interest because it provided relief to stranded passengers. It is also in Avianca’s self-interest because it increases future demand for its flight.

You Got It! - By offering empty seats for free, Avianca increases future demand for its flight and provides relief to stranded passengers.

Use the following notation to work the questions in the multiple choice quiz below:

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