Question

After 9/11, the demand for air travel fell substantially, bringing the airline industry to its knees. Congress wanted to compensate the airlines for losses but there was a great debate over how much money was at stake.

How would you estimate the amount of compensation? Hint: producer surplus.

Answer 1

I would estimate the amount of compensation based on the statistical data relating to the loss that the airline companies are facing since 9/11.

Explanation:

• The surplus that the airline companies were earning over their operational expenses was nothing else but the profit margin that the companies were earning from the business.
• To devise the compensation to be given to the companies, calculating the surplus that they were earning from their operations would thus prove to be an intelligent solution.