CR: Proponents of airline industry deregulation argued that

[vikas.panghal]

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.

OA: E.

Source: Princeton Review test

I chose A as the answer because the the whole argument lies under the assumption that the airlines will invest there profit money in upgrading services rather than somewhere else. So, option A is the best one which states similar.

Please correct me If I'm wrong.

~VP

[mikrodj]

IMO option A says that the Airlines reinvest all profits. This doesn't need to be true since the Airlines can reinvest some of their profits but not all.
The logic negation of all is not all, or in other words some.

[Ben Ku]

One way to find assumptions in an argument is to see whether the argument would collapse if the assumption were not true.

In (A), if airlines do spend profits in other ways, such as dividend payments, will the argument still hold? I believe so, since regardless of how the profits are spent, the "attractive profit margins" would still lead to the formation of new airlines, and due to competition in the long run, lower fares.

The argument is basically posing an economic issue: if the supply increases, then the prices go down. However, if the demand increases with the supply, fares may not drop. We are assuming that by having new airlines enter the industry, the demand does not increase. This is what is stated in (E): that the supply would increase more than the demand.

Hope that helps.