Answer to Question #75345 in Microeconomics for bryan

Question

In the market for air travel, which of the following variables would decrease demand, ceteris paribus?
a) An increase in rental rates for hired cars, a substitute.
b) A rise in income of tourists.
c) A rise in the price of air travel.
d) A rise in the price of hotel accommodation, a complement.

Answer 1

An increase in rental rates of hired cars, substitute to air travel, will result in an increase in demand for air travel. This is because an increase in the price of a substitute will lead to an increase in demand for its substitute goods. A rise in tourists’ income means that more tourists can afford to use air travels, therefore, an increase in demand for air travel.
The variables that would decrease demand for air travel are a rise in the price of air travel and a rise in the price of hotel accommodation. First, an increase in the price of air travel will result in few customers travelling by air because they may not afford the travel cost or will seek for other means of travel (substitute). This is aligned with the law of demand that states that an increase in prices results to a decrease in demand. Second, a rise in the price of hotel accommodation, which is a complementary good, will result to a decrease in demand for air travel since customers may not be able to afford the cost of hotel accommodations. Complementary goods are bought together therefore; an increase in price of hotel accommodation will result in a decrease in demand for air travel.
In conclusion, the variables that would decrease demand for air travel are a rise in the price of air travel and a rise in the price of hotel accommodation.