In Alaska, the state ferry system transports passengers and vehicles. With the ferry system incurring a financial deficit, Governor Frank Murkowski blamed losses in part on increased winter sailings. However, management's view was that: "Even when a vessel is tied up, expenses are still incurred as a captain and crew must be on board and line handlers must be available." In 2005, the ferry system raised fares by 17%, and revenue fell. However, the following year, the system cut fares and registered an 18% increase in winter revenue. (Sources: Alaska State Senate Finance Committee hearing, March 2, 2006; Alaska Public Radio, October 17, 2005.)

(a) Categorize the following as fixed or variable costs in the short run: (i) depreciation of ships; (ii) salaries and wages; (iii) fuel expenses.

(b) How can you infer that the demand for ferry service is elastic?

(c) Supposing that the ferry system aims to minimize losses, under what condition should the system increase winter sailings?