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Fliers Fly Less Frequently
Subject Comparative statics
Topic Production and Costs
Key Words Cost, losses
News Story

Following the terrorist attack on the World Trade Center, airports were shut down for two days. There were knock-on effects for cruise lines, hotels, car rental companies, and other travel-related businesses.

One estimate of the cost to U.S. airlines is $2.1 billion this year and next. Trade shows and conventions were canceled or postponed in New York City and elsewhere. Cities lose roughly $1,200 for every person who does not attend a conference. Although they benefited from stranded passengers, hotels are expecting their worst losses in 33 years.

Similarly, car rental companies found their business increasing as people drove themselves home after the attacks, but then suffered from cancellations and cars in the wrong locations. Cruise lines also saw cancellations because passengers could not fly to the port of departure or because they did not want to fly. Theme parks closed for a day and then saw their attendance levels soften, but the effect was small as the peak season is over.

(Updated October 1, 2001)

Questions
1. Draw a diagram of a firm in the hotel industry showing prices and costs on the vertical axis and the number of hotel nights on the horizontal axis. Include the marginal, average total and average variable cost curves. Show a horizontal price line such that, at the profit-maximizing output, the firm is breaking even.
a) What probably happened to the price due to an increase in demand caused by stranded passengers?
b) What was the effect on the number of hotel nights booked and the hotel's profit as a result? Illustrate.
c) What probably happened to the price of hotel rooms after cancellations?
d) What was the effect on the number of hotel nights and the hotel's profit? Illustrate.
e) Under what circumstances would the hotel have to shut down in the short run?
2. Of the industries cited in the news story, which one is most likely to see member firms shut down in the short run? Explain the factors on which your answer depends.
Source Chris Woodyard, Gene Sloan, and Salina Kahn, "Travel industry faces huge losses," USA Today, September 14, 2001.

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