The world airline system is composed of the routes X and Y, each of which requires 10 aircrafts. These routes can be serviced by three types of aircrafts A, B, and C. There are 5 type A aircrafts available, 10 type B, and 10 type C. These aircrafts are identical except for their operating costs, which are as follows:

Annual Operating Cost ($ millions)

Aircraft Type Rout X Route Y

A 1.5 1.5

B 2.5 2

C 4.5 3.5

The aircrafts have a useful life of five years and a salvage value of $1 million. The aircrafts owners do not operate the aircrafts themselves but rent them to the operators. Owners act competitively to maximize their rental income, and operators attempt to minimize their operating costs. Airfares are also competitively determined. Assume the cost of capital is 10%.

(a) Which aircraft would be used on which route, and how much would each aircraft be worth?

(b) What would happen to usage and prices of each aircraft if the number of type A aircraft increased to 10?

(c) What would happen if the number of type A aircraft increased to 15?

(d) What would happen if the number of type A aircraft increased to 20? State any additional assumptions you need to make.