Question

If the U.S. government decided to regulate the prices of airline tickets to keep them from falling when the economy is weak, there would tend to be a ________ of airline tickets in the market and this would likely ________ the profits of U.S. airlines.

Answer 1

Answer:

If the U.S. government decided to regulate the prices of airline tickets to keep them from falling when the economy is weak, there would tend to be a SUPPLY SURPLUS of airline tickets in the market and this would likely DECREASE the profits of U.S. airlines.

Explanation:

In order to regulate the prices of airline tickets, the government will most likely impose a binding price floor, which means setting up a minimum price. The problem is that since the price floor is above the equilibrium price, then the quantity supplied will increase (as price is higher) but the quantity demanded will decrease (since the price is too high).

A price floor always results in a loss of economic efficiency resulting in a deadweight loss that hurts both suppliers and consumers. Suppliers will offer more services increasing their costs, while consumers will stop flying.