Question

Suppose that the airline industry is in long-run equilibrium when the price of gasoline increases, raising the cost of operating airplanes. In the long run, the number of airlines in business should:________a. remain constant with lower profits.b. increase.c. decrease.d. remain constant with constant profits.

Answer 1

Answer: c. decrease.

Explanation:

If the cost of operating airplanes increases on account of gasoline prices rising, it means that running an airline service would be more expensive.

In the long-run, there is zero economic profit as companies keep entering and exiting the market. If costs increase as they have done here, there will be an economic loss. Several firms will therefore exit in order to avoid these costs which would lead to the number of airlines decreasing.

When they decrease, prices will then go up till the economic profit is zero once more.