Question

The Hound Dog Bus Company contemplates expanding its Virginia operations by offering services from Fairfax to Arlington. The total cost of the trip would be $120, of which $50 is the fixed cost, which it has already paid. The firm expects to earn an additional $60 in revenue from the trip. The Hound Dog Bus Company should:

Answer 1

The Hound Dog Bus Company should not expand

Step-by-step explanation:

The decision to expand should be made if the incremental (marginal) cost to be incurred is less than the incremental revenue to be earned.

Incremental revenue = $60 (given)

Incremental cost = total cost - already incurred (non-incremental) cost

= 120 - 50 = $70.

Since the incremental revenue ($60) is less than the incremental cost ($70), the company should not expand.