Topic: Economics

Order Description

attached is a case study which cover the Marginal Cost of an extra coach. please read carefully the case and put different scenario to answer to any question could be ask in this case. This case might not only talk about the marginal cost but it might also cover other part of economy such as Elasticity, inelasticity, pricing i don’t know really, i think with your reading you could figure it out your self.

Putting on a Duplicate
Marginal costs of an extra coach

A  few  years  ago,  I  had  to  travel  to  London  by  coach  and  decided  to  book  my  seat  early  in
case the coach was full.  There is no need to do that,’ I was told, because we will always put
on an extra coach if there is not enough room on the first.’

Was this an example of irrational’ behaviour on the part of the coach company?  What is the
cost of providing me with a seat on that second coach?  Will the company make a loss on my
custom?

Let us assume that the cost of putting on a second coach to London holding 50 passengers is
£500.    When  deciding  whether  to  put  on  the  coach,  what  is  the  marginal  cost  that  the  firm
must  take  into  account?    The  answer  is  that  it  depends  on  how  many  people  travel  on it.
Remember that the formula for marginal cost is ΔTC/ΔQ.  If I have the coach to myself (ΔQ
= 1), the marginal cost will be £500.  In other words the coach company is having to pay an
extra  £500  to  let  me  have  a  seat.    Clearly  it  will  be  making  a  loss  by  putting  on  that  extra
coach.

If, however, 50 people use the second coach, the marginal cost of providing the extra seats is
only £10 per seat: ΔTC/ΔQ =  £500/50  =  £10.  Presumably,  with  a  full  coach,  the  company
will make a profit.

Once  it  has  had  to  put  on  a  second  coach and  has  thus  incurred  the  extra £500  cost,  the
marginal cost of extra passengers on that coach will be zero.  In other words the marginal cost
of the first passenger is £500; thereafter there are no extra costs to be incurred (except maybe
for a little extra fuel to cope with the extra weight) until a third coach is put on.

If, then, the question is whether to put on a second coach, and if all the company is thinking
about  is  its  short-term  profits,  the  marginal  cost  it  will  look  at  is  the  marginal  cost  per
passenger on it: i.e. ΔTC/ΔQ.  If, however, it has already put on that second coach and it has
vacant  seats,  the  marginal  cost  of  taking  one  more  passenger  (say  a  person  arriving  at  the
coach  station  at  the  last  minute  and  wanting  to  buy  a  ticket  on  the  coach)  will  be  virtually
zero.