Question

What will happen to the equilibrium price and quantity of airline fares as a result of the following two simultaneous changes (assume no other changes): I. the recent recession has encouraged people to save more, so fewer people decide to go on vacation. II. higher oil prices and weather-related difficulties have increased the cost of providing airline services.

Answer 1

Equilibrium quantity would increase. there would be an indeterminate effect on equilibrium price

Step-by-step explanation:

If fewer people go on vacation fewer people would board planes. As a result, the demand curve for planes would shift inwards. This would lead to a decrease in equilibrium price and quantity.

As a result of the higher cost of providing services, fewer planes would be in operation. This would lead to an inward shift of the supply curve. Equilibrium price would increase and equilibrium quantity would decrease.

Taking this two effects together, equilibrium quantity would increase. there would be an indeterminate effect on equilibrium price.