Proponents of airline industry deregulation argued that airl

Question

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!!!

Narenn · Accepted Answer

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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skyhawk · Answer

Please post the official answer for a better explanation.
Is the OA E?

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ramannanda9 · Answer

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

maxk297 · Answer

E-gmat I love You!!!!!!!

I used the E-gmat procedure to solve this question. Because I just started learning, i was a little slow at arriving at the answer.

and in this question the assumption I pre- thought was the right one

ssriva2 · Answer

Answer should be E

Hey  Narenn ,

Can you please explain OA E.
If available seats are less than seats in demand,price should increase not decrease as seats are less and demand is more.People will be ready to pay for them

Please help me to understand this.

Spovil · Answer

E is the correct answer

Conclusion: airlines should be allowed to set fares as high or low as they please
Premise (Main one): 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

Argument is trying to say that with increased competition, more seats would be on offer. With more seats available and a desire to get them filled, airline operators would slash the pricing of seats. This price war would lead to price of seats actually declining resulting in customers moving towards an airline offering the best rate.

So, to enable such a scenario, the number of increased seats on offer should be more than number of new people who are vying for the seats.

Rumikido3 · Answer

Hello guys... here is my analysis

Structure  
Conclusion: Fares would inevitable decline
Basis. of conclusion (P): Because of an expanded number of Airlines in the market, they would have to compete to fill seats.
P1: attractive PM --> would lead to the formation of new airlines.

Pre-thinking Analysis  
The author says that Airlines would have to reduce fares to attract customers because competence will be rough. For this conclusion to be true, he is assuming that 
Offer > demand.

Answer choice Analysis  
A Airlines reinvest all profits by upgrading services and do not spend them in other ways, such as dividend payments.  Irrelevant
Whatever airlines do with their profits doesn't affect the basis of the conclusion

B Only preexisting airlines would profit significantly from market deregulation.  OFS
The degree at what a group of airlines would profit as a consequence of market deregulation is not in discussion.

C A free airline market will inevitably lead to a price-setting system based on a proportion of revenues to routes flown.  OFS
The way flight fares will be set is out of scope.

D An increase in the number of seats available in the airline industry would necessarily lead to an increased demand for those seats.  Inconclusive
+ # of seats (offer) --> + demand... Does it mean that Offer > demand? we don't know, so it is incorrect.

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!
Offer > Demand. Alligned with pre-thinking. If we negated the assumption (Demand exceeds offer), there is no reasons why to reduce fares because customers would be fighting for seats and will be willing to pay more. So the conclusion is shattered

Hope my analysis help!

Rumi

adim10 · Answer

Answer should be E. If the demand for seats are more than the increase in seats. Airlines can continue to charge high prices for seats because they know customers would still pay regardless of the price.

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Shiv2016 · Answer

Premise: Proponents of airline industry deregulation argued that airlines should be allowed to set fares as high or low as they please. 
Premise: 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. 
Premise: They also predicted that attractive profit margins would possibly lead to the formation of new airlines. 
Premise: 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

Conclusion: fares would, thus, inevitably decline.

- The proponents here assume that at the start of this plan, customers would pay such high fares. If they do not do so, the whole plan fails because then the airlines would not be able to expand their services, no profit margins, and finally no formation of new airlines.
- If the demand won’t be there, then the plan would fail.
Let’s look at the choices:
A. Airlines reinvest all profits by upgrading services and do not spend them in other ways, such as dividend payments. 
INCORRECT. How will the fares decline ?

B. Only pre-existing airlines would profit significantly from market deregulation.
INCORRECT. Does not support the conclusion.

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

D. An increase in the number of seats available in the airline industry would necessarily lead to an increased demand for those seats.
 increase in the seats would lead to increased demand. But will the customers buy the seats available or not? Option E affirms it.

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.
Negated statement: The increase in the number of seats available in the airline industry would NOT exceed the number of new passengers shopping for seats in the same period.

If this is so then NUMBER OF AVAILABLE SEATS WOULD BE EQUAL TO NUMBER OF PASSENGERS
So there would be no loss of seats. If passengers are not there to buy those seats, then the prices would remain high.
Correct.

This question is little confusing especially option D and E. pretty close but according to me, the difference comes from the fact whether customers are ready to pay for the seats or not?

newyork2012 · Answer

Chose A, but after carefully reading again, I realized that A is deader than dead

A says Airlines reinvest all profits ...all.. all all all

Airlines do not need to reinvest all ... just some or good enough portion of profit

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JS1290 · Answer

Could someone please explain why option D is incorrect? I founded D and E to be extremely close. If option D is negated, doesn't that break down the conclusion?

newyork2012 · Answer

D is totally wrong .. D says that the expansion of airline seats will bring more competition ... this means that the price will not decline

E says the increase of passengers will fall behind the speed of airline expansion ..this is why airlines will need to lower their prices to attract passengers

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VerbalBot · Answer

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