Economics - Profit Maximization Behavior of Swissair

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

ECONOMICS1
Executive Summary
The report aims at analyzing and interpreting the profit maximization behavior of Swissair, a
monopoly Jet Company of the country Switzerland. To find out the profit maximization level
output and price, cost (Total Cost, Total Fixed Cost, Total Variable Cost, Average Cost, Average
Fixed Cost, Average Variable Cost and Marginal Cost), revenue (Total Revenue, Average
Revenue and Marginal Revenue) and profit calculation of the firm is done. On the basis of the
graph obtain by plotting Marginal Cost, Average Revenue and Marginal Revenue, profit
maximization price and output is obtain which are $900 and 600 units respectively. The profit
maximization behavior of the firm is also illustrated followed by a demonstration of market
failure which occurs due to the deadweight loss, diminishing social welfare. Several
interventions of the government that can remove the market failure of the Swissair are also
provided. Next, an evaluation of economic phenomenon of the country is done along with its
(GDP) Gross Domestic Product. An analysis of business cycle is carried out to find the effect it
has on the firm. Finally unemployment rate and inflation rate is determined. Comments are made
on the cost and cause of unemployment and inflation besides providing the government policies
to handle the phenomenon.

ECONOMICS2
Table of Contents
Introduction......................................................................................................................................3
Profit maximization behavior of a firm...........................................................................................4
Short-run and Long-run cost calculation.....................................................................................4
Profit Calculation of Swissair......................................................................................................5
Profit Maximization of Swissair..................................................................................................6
Explaining the firm’s Profit Maximization behavior...................................................................7
Cause of Market Failure..............................................................................................................8
Government intervention to address the market failure..............................................................9
Macroeconomic consideration and government policy.................................................................10
Effect of Business Cycles on the firms......................................................................................11
Unemployment and inflation scenario of Switzerland..............................................................13
Demand-pull and cost-push inflation.........................................................................................14
Fiscal policy...............................................................................................................................16
Monetary policy.........................................................................................................................18
Conclusion.....................................................................................................................................20
References......................................................................................................................................23

ECONOMICS3
Introduction
Each and every organization has many objectives that it aims to achieve. In general, it is
believed that all the business houses have the sole objective of earning lump sum profit but
actually it is not so. Besides pursuing the aim of earning maximum profit, a firm focuses on
increasing market share, sales maximization, creating customers, innovative activities, social
concern and so on. A firm’s basic economic objectives mainly includes the objective of profit
earning and other objectives which are vital for achieving high amount of profit (Ghamkhari, &
Mohsenian-Rad, 2013). Profit earned by a business is considered as the heart of any organization
in absence of which no firm can face and survive the stiff market competition (Wilburn, &
Wilburn, 2014). In addition to the primary aim of maximizing profit, a firm also focuses on
gaining popularity and attracting more consumers by offering quality product at reasonable
(Stefanović et al., 2015).
For any nation, government plays a vital role in helping the economy to reach its
optimum performance level and for this he has four primary macroeconomic objectives of
maintaining a high employment level, price stability, encouraging economic growth and trade
(Nepal & Jamasb, 2015). Besides these primary objectives, some other important objectives of
government include ensuring equal distribution of wealth and income, strengthening the labor
productivity as well as achieving thermal equilibrium (Égert, 2016).
The objective of this report is to understand the profit maximizing behavior of a
monopoly firm of Switzerland, Swissair, and also to evaluate a number of macro-economic
consideration (like Gross Domestic Product, Economic Growth, Business Cycle, Inflation and
Unemployment) and government policies (Fiscal Policy and Monetary Policy)

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The structure of this report consists of an initial analysis of the profit maximizing
behavior of the business, Swissair, by calculating costs, revenue and profit and then addressing
the government interventions undertaken for market failure. This analytical segment is followed
by interpretation and explanation of various macro-economic factors and government policies.
Finally a conclusion has been drawn based on the outcome of the report.
Profit maximization behavior of a firm
The term “profit maximization” can be defined as a process (Short run or Long run) that
helps a firm to determine its level of input, output and price which in turn leads to high level of
profit (Young & Makhija, 2014). Swissair, Jet Company of Switzerland is taken to calculate its
profit maximizing behavior.
Short-run and Long-run cost calculation
Table 1: Short and Long run cost of Swissair (in dollars)
Units
of
Output
(Q)
Total
Fixed
Cost
(TFC)
Total
Variable
Cost
(TVC)
Total
cost
(TC)
Average
Cost
(AC)
Average
Fixed
Cost
(AFC)
Average
Variable
Cost
(AVC)
Marginal
Cost
(MC)
0 500 0 500 - - 0 -
1 500 1000 1500 1500 500 1000 1500
2 500 1300 1800 900 250 650 300
3 500 1700 2200 733 166.6667 566.6667 400
4 500 2300 2800 700 125 575 600
5 500 3000 3500 700 100 600 700
6 500 3700 4200 700 83.33333 616.6667 700
7 500 5100 5600 800 71.42857 728.5714 1400

ECONOMICS5
8 500 6900 7400 925 62.5 862.5 1800
9 500 8765 9265 1029 55.55556 973.89 1865
10 500 10260 10760 1076 50 1026 1985
Source: (swiss.com, 2019)
Revenue Calculation of Swissair
Table 2: Price setting of Swissair (in dollars)
Units of
Output
(Q)
Price
(P)
Total
Revenue
(TR)
Average
Revenue
(AR)
Marginal
Revenue
(MR)
0 0 0 0 0
1 1200 1200 1200 1200
2 1100 2200 1100 1000
3 1000 3000 1000 800
4 900 3600 900 600
5 800 4000 800 400
6 700 4200 700 200
7 600 4200 600 0
8 500 4000 500 -200
9 400 3600 400 -400
10 300 3000 300 -600
Source: (archive, 2019)