Consider the market for air travel.A simultaneous increase in the price of fuel and another terrorist attack on United States soil would cause the equilibrium quantity of air travel to go down,but have an uncertain effect on equilibrium price.

Question

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An increase in the price of fuel would increase the cost of air travel, causing the demand for air travel to decrease. A terrorist attack would also decrease the demand for air travel due to safety concerns. Both of these factors would shift the demand curve to the left, decreasing the equilibrium quantity of air travel. However, the effect on equilibrium price is uncertain because an increase in cost from higher fuel prices could lead to airlines raising prices to maintain profits, while a decrease in demand due to a terrorist attack could lead to airlines lowering prices to attract customers. Thus, the effect on equilibrium price is ambiguous.

Consider the Market for Air Travel