-The Above Figure Shows the Payoff to Two Airlines,A and B,of

question 1

Multiple Choice

-The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,and the government imposes a $20 per firm tax on firms that service this route,which of the following maximizes the firms' joint profits?

• A) Neither firm services the route.
• B) Firm A offers firm B $20 to not enter.
• C) Both firms will service this route.
• D) Firm B offers firm A $30 to not enter.

---

Definitions:

Law of Diminishing Returns

Law of Diminishing Returns states that in a production process, adding an additional factor of production, while holding all others constant, will at some point yield lower per-unit returns.

Sunk Costs

Costs that have already been incurred and cannot be recovered or refunded, and should not influence current or future decisions.

Variable Costs

Costs that change in proportion to the level of production or service activity.

Fixed Costs

Expenses that remain constant regardless of the amount of production, like lease payments or wages.