Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs?
A) Fly Right.
B) Fly by Night
C) Neither, the costs are identical.
D) Neither, Fly by Night has lower costs at small output levels and Fly Right has lower costs at high output levels.

Question

Quizplus · Accepted Answer

Both airlines effectively have the same annual cost for their airplanes—Fly Right could earn $30,000 by renting out its plane, so its opportunity cost of using the plane is $30,000, the same as Fly by Night's rental cost.

Two Small Airlines Provide Shuttle Service Between Las Vegas and Reno