Other things remaining equal, a decrease in the world oil supply like those that occurred in 1973-74 and 1979 would
Part 2
A.
decrease the price of airline travel and increase its equilibrium quantity.
B.
increase the price of airline travel and increase its equilibrium quantity.
C.
decrease the price of airline travel and decrease its equilibrium quantity.
D.
increase the price of airline travel and decrease its equilibrium quantity.
D. increase the price of airline travel and decrease its equilibrium quantity.
To determine how a decrease in the world oil supply would affect the price and equilibrium quantity of airline travel, we need to consider the relationship between oil prices and the cost of airline travel.
1. Start by understanding the impact of oil prices on airline travel costs: Airline companies rely heavily on jet fuel, which is derived from oil. Thus, any change in oil prices directly affects the operating costs of airlines.
2. If the world oil supply decreases, it means less oil is available, leading to higher oil prices. As a result, airline companies would face higher costs for jet fuel. These increased costs would likely be passed on to consumers in the form of higher ticket prices.
3. Higher airline ticket prices, in turn, would tend to decrease the demand for airline travel. As tickets become more expensive, some travelers may choose to forgo or reduce their air travel, resulting in a decrease in the equilibrium quantity of airline travel.
Based on this analysis, the correct answer is option D: an increase in the price of airline travel and a decrease in its equilibrium quantity. This is because a decrease in the world oil supply leads to higher operating costs for airlines, which are then passed on to consumers in the form of higher ticket prices. Higher prices would, in turn, lead to a decrease in the quantity of airline travel demanded.