In 2016 the price of oil fell to a 12-year low. For drivers, the cost of driving fell significantly as gasoline prices plunged. For the airline industry, the cost of operation also fell significantly because jet fuel is a major expense.
a. Draw a supply and demand diagram that illustrates the effect of a fall in the prtce of jet fuel on the sup- ply of air travel.
b. Draw a supply and demand diagram that illustrates the effect of a fall in the price of oil on the demand for air travel. (Hint: think about this in terms of the substitutes for air travel, like driving.)
c. Put the diagrams from parts a and b together. What happens to the equilibrium price and quantity of air travel? Despite the fall in the cost of driving, many more Americans chose to fly to their destinations during 2014 to 2016, as incomes rose and people splurged on vacations that had been postponed during the Great Recession.
d. Using your results from part c, modify your dia- gram to illustrate an outcome in which the equilib- rium price of air travel rises as people take more! vacations by air.
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