Question

Pressures of supply and demand act directly on the prices of airline tickets. As the seats available on the plane begin to fill, airlines raise the price. If seats on a flight do not sell well, an airline may discount the tickets or even cancel the flight. Allie Henrich, a BYU-Idaho student, WANTED TO PREDICT THE PRICE OF TICKETS 14 DAYS BEFORE A FLIGHT BASED ON THE PRICE OF TICKETS LISTED 90 DAYS BEFORE THE SAME FLIGHT. For her study she compared the prices of one-way flights from London's Heathrow Airport to various destinations in Europe. Using Travelocity.com, she recorded the lowest published fares for 90 nonstop midweek flights 90 days in advance and then found the lowest published price for the same destination again 14 days in advance. The prices (in US dollars) are given in the file DirectFlightCosts. Notice that for some destinations, flights were not available.

1. Compute the sample correlation coefficient of the 14 Days before flight ticket prices compared with the 90-Days before flight ticket prices. Give your answer accurate to three decimals.2. Create a scatterplot using these two variables. Using this scatterplot and referring to the correlation coefficient above, select the answer that best describes the data illustrated in the scatterplot.a. Linear with a fairly strong negative associationb. Linear with a fairly strong positive associationc. Linear with a strong negative associationd. Nonlinear

Answer 1

The decrease in jet fuel prices would likely lead to a lower equilibrium price and higher equilibrium quantity in the air travel market. The increased supply due to lower costs can also result in more affordable air travel, potentially raising demand over time.

Step-by-step explanation:

When analyzing air travel market dynamics, the decrease in the price of jet fuel by approximately 47% from August 2014 to January 2015 can significantly affect the equilibrium price and quantity of air travel. To understand the impact, we use a four-step analysis:

1. JET FUEL AS A COST: Jet fuel is a major input in the airline industry, so a decrease in jet fuel prices reduces the cost of providing air travel services.
2. SUPPLY CURVE SHIFT: With lower costs, the supply curve shifts to the right, meaning airlines are willing to offer more flights at each price level.
3. CHANGE IN EQUILIBRIUM: The increase in supply, with demand remaining constant, would typically lead to a lower equilibrium price for air travel. More flights at lower prices can make air travel more accessible, increasing the equilibrium quantity.
4. MARKET ADJUSTMENTS: Over time, if air travel becomes cheaper, the demand for flying may increase as more consumers find it affordable. This increased demand could lead to an upward shift in the demand curve, potentially raising prices slightly from the new equilibrium but also leading to even higher quantities of air travel sold.

Hence, a decrease in jet fuel prices would likely lead to a decrease in the equilibrium price of air travel and an increase in the equilibrium quantity, assuming no other changes in the market.