Chapter 4, Problem 5P

To determine

Assume that due to a decrease in demand, the average domestic airline fare decreased from $371.72 in the third quarter of 2015 to $362.56 in the fourth quarter of the same year, a decrease of $9.16. The number of passenger tickets sold in the third quarter was 183.9 million and 175.9 million in the fourth quarter. Over the same period, the airlines’ costs remained roughly the same. The price of jet fuel averaged around $2 per gallon in both quarters, and airline pilots’ salaries remained roughly the same, averaging $117,290 per year in 2015.

Can you determine precisely by how much producer surplus has decreased as a result of the $9.16 decrease in the average fare? If you cannot be precise, can you determine whether it will be less than, or more than, a specific amount?

Concept Introduction:

Consumer Surplus:

It is defined as the difference between consumer’s willingness to pay and how much does a consumer pay for the goods and services. It is the area above the price level and below the demand curve.

Producer Surplus:

It is defined as the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. It is the area below the price level and above the supply curve.