Question

From:	John Becker
To:	You
Subject:	Help a Travel Agency with Costs

The owner of a local travel agency came to our office requesting some help with her business. It seems she's had some significant changes in her costs and she isn't sure how they are going to affect her business. I'd like you to review her situation and help her evaluate the changes in costs. I'm forwarding (see below) the cost information the travel agency owner provided.

-----Original Message-----

From:	Lucy Wills, Owner, Mythos Travel Enterprises
To:	John Becker, Senior Economist
Subject:	My Travel Agency Costs

As per our phone conversation yesterday, I'm sending you information about my current travel agency costs.

My current rent is $500 per month, and I am in the second month of a 1-year lease. I also pay access fees for the Calget travel-agency database. This database allows me to book tickets for airlines, trains, vacations, etc. directly with the supplier. The current fees are $100 per month to access the database, plus per booking fees of $15.

Now, my landlord has informed me that he will be increasing my rent to $900 per month! He says this is because the area has grown so much that the land is much more valuable. I'm sure he's correct, as everyone has noticed how much busier the neighborhood is these days. However, I'm not sure I can afford to pay that much for rent and still stay in business!

Fortunately, I've also learned that Calget is going to reduce their fees substantially. They are reducing the monthly access fee to $25 and lowering the per-booking fee to $5.

I'd appreciate any help or advice regarding my situation. I'm drowning in bills!

Sincerely,
Lucy Wills
Mythos Travel Enterprises

• identify whether the change in the price of the database is a fixed or variable cost
• describe how total, average, variable, and marginal costs will change after the change in the database price
• identify whether the rent increase is a fixed or variable cost
• describe how total, average, variable, and marginal costs will change after the rent increase

Answer 1

(1)

The monthly access fee for the database is a fixed cost, and the per-booking fee for database is a variable cost (which depends on number of bookings). So the Database cost is a Mixed cost.

(2)

Both the fixed and variable cost components are lower. So, total cost will decrease, average cost will decrease and marginal cost will decrease.

(3)

Since rent does not depend on number of bookings, this is a fixed cost.

(4)

Increase in rent will increase fixed cost, leaving variable cost unchanged. So total cost will increase, average cost will increase and marginal cost will not change.