MRU8.8: Price Floors: Airline Fares

Which of the following did NOT occur when the CAB was eliminated in the 1970s? - Quality decreased. - Average cost increased. - Quantity increased. - Air fares decreased.

A: Average cost increased.

How do we know that airline customers preferred lower prices over better quality? - Because after deregulation of the airlines, prices fell and quality rose. - Because after deregulation of the airlines, prices rose and quality fell. - Because after deregulation of the airlines, prices and quality both rose. - Because after deregulation of the airlines, prices and quality both fell.

A: Because after deregulation of the airlines, prices and quality both fell.

Which of the following demonstrates the misallocation of resources caused by the CAB's price floors on airline fares? - Many airlines began to put off routine maintenance, reducing the safety of air travel. - Low-cost airlines, such as Southwest Airlines, were kept out of the market. - Some airlines featured live music and wide, comfortable seats on airplanes. - Fares for flights within states were lower than fares for comparable flights between states.

A: Low-cost airlines, such as Southwest Airlines, were kept out of the market.

What made the increases in quality caused by the price floor on airline fares wasteful? - The price floor causes quality to increase for sellers, not for buyers. - The prices that buyers paid were not high enough to cover the cost of the increased quality. - The cost of the increased quality exceeded the cost of operating the planes. - The cost of the increased quality exceeded the value to buyers of the increased quality.

A: The cost of the increased quality exceeded the value to buyers of the increased quality.

Which of the following is presented as evidence that the air fares set by the CAB were above the market prices? - The fares for flights not subject to CAB regulations were much higher than the fares for similar flights that were subject to CAB regulations. - The number of flights not subject to CAB regulations was much lower than the number of flights that were subject to CAB regulations. - The number of flights not subject to CAB regulations was much higher than the number of flights that were subject to CAB regulations. - The fares for flights not subject to CAB regulations were much lower than the fares for similar flights that were subject to CAB regulations.

A: The fares for flights not subject to CAB regulations were much lower than the fares for similar flights that were subject to CAB regulations.

It can be inferred that which of the following happened in the airline industry following its deregulation? - The number of airlines serving the industry rose, and average cost fell. - The number of airlines serving the industry fell, and average cost fell. - The number of airlines serving the industry rose, and average cost rose. - The number of airlines serving the industry fell, and average cost rose.

A: The number of airlines serving the industry rose, and average cost fell.

From 1938 to 1978, the Civil Aeronautics Board (CAB) kept air fares in the United States: - below the market price, for flights within states. - below the market price, for flights between states. - above the market price, for flights between states. - above the market price, for flights within states.

A: above the market price, for flights between states.

Because of the price floors in place until 1978, airlines in the United States had to: - save money by reducing quality, rather than simply raising prices. - substitute within-state routes for between-state routes whenever possible. - forgo routine maintenance on planes used for between-state routes. - compete for customers on the basis of quality, rather than on the basis of price.

A: compete for customers on the basis of quality, rather than on the basis of price.

Airlines regulated by the CAB eventually: - lost their producer surplus when they were forced out due to their high costs. - gave up their producer surplus as they competed for buyers. - transferred their producer surplus to the government in the form of taxes. - enjoyed increases in producer surplus thanks to lower prices.

A: gave up their producer surplus as they competed for buyers.

The quantity demanded at the CAB-regulated price for airfare: - was equal to the quantity supplied, since the CAB regulated an equilibrium price in the market. - was greater than the quantity supplied, since the CAB-regulated price was too low. - was equal to the quantity supplied, since the CAB also regulated entry. - was lower than the quantity supplied, since the CAB-regulated price caused a surplus.

A: was equal to the quantity supplied, since the CAB also regulated entry.