Description
Equilibrium price – CLO 1, CLO 3, CLO 4, CLO 6, CLO 8
The company “World Airline System” is composed of the routes X and Y, and each route requires 10 aircrafts. These routes can be serviced by three types of aircrafts — A, B, and C. There are (five) 5 type A aircraft available, 10 type B, and 10 type C. These aircrafts are identical except for their operating costs, which are as follows:
Annual operating cost ($ millions)
Aircraft type | Route X | Route Y |
A | 1.5 | 1.5 |
B | 2.5 | 2.0 |
C | 4.5 | 3.5 |
The aircrafts have a useful life of five years and a salvage value of $1 million.
The aircrafts owners do not operate the aircrafts themselves but rent them to the operators. Owners act competitively to maximize their rental income, and operators attempt to minimize their operating costs. Airfares are also competitively determined. Assume the cost of capital is 10%.
- Which aircraft would be used on which route, and how much would each aircraft be worth?
- What would happen to usage and prices of each aircraft if the number of type A aircrafts increased to 10, 15, or 20?
State any additional assumptions you need to make.
Please explain your answer in detail and provide in-text citations.
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Explanation & Answer
Attached. Please let me know if you have any questions or need revisions.
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EQUILIBRIUM IN THE MARKET
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February 12, 2021
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EQUILIBRIUM IN THE MARKET
Equilibrium in the Market
Equilibrium in the market is achieved when the market supply is equal to the market
demand. This equilibrium results into stability of prices. Aircraft B would be used on route X
and Aircra...
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