Airlines are having difficulty keeping prices low, especially as fuel prices keep rising. Airlines have raised fares to make up for the fuel costs. American Airlines increased its fuel surcharge by $20 a roundtrip, which Delta, United Airlines, and Continental matched.
a. Explain how an increase in fuel prices might cause an airline to change its output (number of flights) in the short run.
b. Draw a graph to show the increase in fuel prices on an airline’s output in the short run.
c. Explain why an airline might incur an economic loss in the short run as fuel prices rise.