Economist Work-out

Week 1a
Solutions
1. Some of the main components of the opportunity cost of flying would be likely to
be:
Resource used Value in next best use
Cost of ticket -> Money Value as monetary cost of ticket
ime spent tra!elling -> ime Value of ne"t best use of time
ime spent purchasing ticket -.ime Value of ne"t best use of time
#urchase of items necessary for tra!el
that would not otherwise be purchased
eg.$ luggage -> Money
Value as monetary cost of items
#urchase of food that would not
otherwise be purchased -> Money
Value as monetary cost of food
ra!el to airport eg.$ cost of ta"i fare$
petrol$ parking -> Money
Value as monetary cost of tra!el
%. &ecision-makers take into account the marginal benefit and marginal 'opportunity(
cost of taking an action. 'Marginal benefit would be the benefits from taking a flight$
and marginal cost is the costs from taking a flight.( he )conomist article describes
how more stringent security at airports 'such as baggage checks( has increased the
amount of time taken to complete any flight. Compared to before the greater security$
this will increase the opportunity cost of taking a flight. his increase in marginal
cost relati!e to marginal benefit is likely to cause some indi!iduals to switch away
from flying towards alternati!e modes of tra!elling such as dri!ing 'for e"ample$
those indi!iduals who before the increase in security had *ust a slight preference for
flying o!er dri!ing(. his is another e"ample of decision-makers +responding to
incenti!es,- in this case$ a change in costs associated with taking the action of flying.
.. he e"tra security arrangements / since they use resources such as e"tra workers
and re0uire airline companies to purchase e"tra physical capital such as 1-ray
screeners / will increase the opportunity cost for airlines of supplying the ser!ice of
air tra!el. he )conomist article suggests one main reason why the effect of e"tra
security re0uirements may ha!e a greater ad!erse effect on profitability of low-cost
than other airlines. his is that the opportunity cost of the time taken doing baggage
checks is greater for low-cost airlines. hese airlines ha!e their planes in the air for a
greater proportion of time than other airlines$ and hence baggage checks are more
likely to reduce the amount of time planes spend in the air$ and hence re!enue from
ticket sales$ for low-cost airlines. 2he article also makes the point that low-cost
airlines / since they ha!e less margin between re!enue and cost per passenger / ha!e
less capacity than other airlines to absorb cost increases and maintain positi!e profits.3