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Proponents of airline industry deregulation argued that airl

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Proponents of airline industry deregulation argued that airl [#permalink] New post 08 Sep 2013, 09:23
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C
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E

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Question Stats:

41% (02:55) correct 59% (01:39) wrong based on 172 sessions
Proponents of airline industry deregulation argued that airlines should be allowed to set fares as high or low as they please. Though they acknowledged that this policy would undoubtedly lead to higher fares in the short term, they predicted that the higher revenues generated would allow the existing airlines to upgrade and even expand their services. They also predicted that attractive profit margins would possibly lead to the formation of new airlines. Simple rules of supply and demand, they said, would mean that an expanded industry would then have to compete more vigorously for passengers to fill seats, and fares would, thus, inevitably decline.

The proponents of airline deregulation assumed which of the following to be true?
A Airlines reinvest all profits by upgrading services and do not spend them in other ways, such as dividend payments.
B Only preexisting airlines would profit significantly from market deregulation.
C A free airline market will inevitably lead to a price-setting system based on a proportion of revenues to routes flown.
D An increase in the number of seats available in the airline industry would necessarily lead to an increased demand for those seats.
E The increase in the number of seats available in the airline industry would exceed the number of new passengers shopping for seats in the same period.


Hey Guys,

Can you please help me solve this question. Please answer with a proper and detailed explanation. I got this question from Princeton Review online drills and cannot make any sense of their explanation.

Thanks a ton!!!
[Reveal] Spoiler: OA

Last edited by Narenn on 08 Sep 2013, 11:04, edited 2 times in total.
Topic Renamed - Please use the first sentence of the stimulus to name the topic
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Re: CR: Assumtion Type [#permalink] New post 08 Sep 2013, 09:50
Please post the official answer for a better explanation.
Is the OA E?

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Re: CR: Assumtion Type [#permalink] New post 08 Sep 2013, 11:01
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kalravaibhav wrote:
Proponents of airline industry deregulation argued that airlines should be allowed to set fares as high or low as they please. Though they acknowledged that this policy would undoubtedly lead to higher fares in the short term, they predicted that the higher revenues generated would allow the existing airlines to upgrade and even expand their services. They also predicted that attractive profit margins would possibly lead to the formation of new airlines. Simple rules of supply and demand, they said, would mean that an expanded industry would then have to compete more vigorously for passengers to fill seats, and fares would, thus, inevitably decline.

The proponents of airline deregulation assumed which of the following to be true?
A Airlines reinvest all profits by upgrading services and do not spend them in other ways, such as dividend payments.
B Only preexisting airlines would profit significantly from market deregulation.
C A free airline market will inevitably lead to a price-setting system based on a proportion of revenues to routes flown.
D An increase in the number of seats available in the airline industry would necessarily lead to an increased demand for those seats.
E The increase in the number of seats available in the airline industry would exceed the number of new passengers shopping for seats in the same period.


Answer should be E

There was a close fight between A and E. but the word ALL in Choice A stroke the alarm bell.


Let us analyses all the predictions of the proponents.

Prediction 1 :- higher revenues generated would allow the existing airlines to upgrade and even expand their services. :- (Assumption) Airlines usually use the increased revenues or atleast some portion of those in up-gradation and expansion of their services.

Prediction 2 :- attractive profit margins would possibly lead to the formation of new airlines :- (Assumption) 'Attractive Profit margin' is a one of the factors in the formation of an airline.

Prediction 3 :- expanded industry would then have to compete more vigorously for passengers to fill seats, and fares would, thus, inevitably decline. :- (Assumption) Expanded Industry would not get the sufficient customers to fill out the Increased seats.


We will scan the answer choices keeping in view the above assumptions

A Airlines reinvest all profits by upgrading services and do not spend them in other ways, such as dividend payments. :- Very Attractive Answer Choice. Proponents claimed that with the increased revenues, Airlines can upgrade their service but it is nowhere mentioned in the stimulus that airlines need to divert all of their increased revenue. So Assuming that Airlines reinvest all profits would not be logical. Hence Incorrect.

B Only preexisting airlines would profit significantly from market deregulation. :- Newly formed Airlines can too profit from market deregulation if they control their costs. So this need not to be assumed. Incorrect.

C A free airline market will inevitably lead to a price-setting system based on a proportion of revenues to routes flown. :- Irrelevant

D An increase in the number of seats available in the airline industry would necessarily lead to an increased demand for those seats. :- This would actually weaken the claim of proponents that airlines will have to strive to get customers

E The increase in the number of seats available in the airline industry would exceed the number of new passengers shopping for seats in the same period. :- Correct, This is in line with the Assumption to the 3rd Prediction. Available Seats should always be lower than the demand in order to price to fall down.


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Re: Proponents of airline industry deregulation argued that airl [#permalink] New post 09 Sep 2013, 10:41
E,

Its b/w A and E

A)Airlines reinvest all profits by upgrading services and do not spend them in other ways, such as dividend payments.

Just Avoid Extremes
All is too strong a word; nowhere is it mentioned in the argument, that airlines need to invest all the profits into upgrading services

E)The increase in the number of seats available in the airline industry would exceed the number of new passengers shopping for seats in the same period.

this option is supporting the conclusion and is the correct choice. This option implies that the demand would decrease because supply has increased and hence the prices will be lowered
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Re: Proponents of airline industry deregulation argued that airl   [#permalink] 09 Sep 2013, 10:41
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