The MKWorld airline system is composed of the European and African routes, each of which requires 10 aircrafts. These routes can be serviced by three types of aircraft—A, B, and C. There are five Type A, ten Type B, and ten Type C aircrafts available. These aircraft are identical except for their operating costs, which are as follows:
Aircraft European Route African Route
A 1.5 1.5
B 2.5 2.0
C 4.5 3.5
The aircraft have a life span of five years and a salvage value of $1 million. The aircraft owners do not operate the aircraft themselves, but rent them to operators. Owners act competitively to maximize their rental income, and operators attempt to minimize their operating costs. Airfares are also competitively determined. Assume the cost of capital is 10%:
– Which aircraft would be used on which route, and how much would each aircraft be worth?
– What would happen to usage and price of each aircraft if the number of Type A aircraft increased to 10?
Type A aircraft increased to 15?