Figure 8.10
-In Figure 8.10, airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market. If the minimum market entry quantity is 130 passengers per day, what is Fly Smart's profit when it commits to the entry-deterring quantity?

Question

Quizplus · Accepted Answer

To deter entry of the second airline, Fly Smart must lower its output to the entry-deterring quantity, which is 130 passengers per day, as shown by point N in the diagram. At this quantity, Fly Smart charges a price of $520 per ticket (as shown on the demand curve at point N).

Fly Smart's profit at the entry-deterring quantity is the shaded rectangle in the diagram, which is:
Profit = (Price - Average Total Cost) x Quantity 
Profit = ($520 - $280) x 130 
Profit = $44,400

Therefore, the best choice is B, as it represents Fly Smart's profit at the entry-deterring quantity.

Figure 8.10 -In Figure 8.10, Airline Fly Smart Is Initially a Secure