Question

Let’s think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased roughly 47%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price and quantity of air travel?

a) Equilibrium price increased, quantity decreased.

b) Equilibrium price decreased, quantity increased.

c) Equilibrium price and quantity both increased.

d) Equilibrium price and quantity both decreased.

Answer 1

The 47% increase in jet fuel prices leads to a decrease in the supply of air travel, causing the equilibrium price to increase and the equilibrium quantity of air travel to decrease (option a).

Step-by-step explanation:

When analyzing the impact of a 47% increase in the price of jet fuel on the equilibrium price and quantity of air travel, we use a four-step analysis to understand the changes in the market for air travel:

1. Draw the graph with the initial supply and demand curves for air travel. Then, label the initial equilibrium price and quantity.
   
2. Determine whether the economic event affected supply or demand. In this case, jet fuel is a major cost of producing air travel, so an increase in jet fuel price affects the supply side of the market.
   
3. An increase in the price of jet fuel makes providing air travel more expensive for airlines, leading to a decrease in supply. This is shown as a leftward shift in the supply curve.
   
4. The leftward shift in supply leads to a movement up along the demand curve, resulting in a higher equilibrium price for air travel and a decreased equilibrium quantity.

The correct answer to how the fuel price increase affected the market would be a) Equilibrium price increased, quantity decreased.