Suppose an airline needs a new plane to offer a flight from Detroit to San Francisco. The flight will generate $37 million in passenger revenue each year. To operate the plane costs $2.5 million for fuel, $1 million for the flight crew, and $3.5 million for insurance each year.

Assume the risk-adjusted rate of return is 0.07 and the annual depreciation rate for an airplane is 0.08. a. (6 points)

Given the information above, what should the market price of the plane be? Hint: the user cost expression is MPK = p( r + )

b. (4 points) How much should the airline expect to pay in yearly maintenance if it doesn't want the plane to lose its value?