United Airlines and Continental Airlines announced a $3 billion merger to create the world's biggest airline. The new airline will be able to better compete with low-cost domestic and foreign airlines. Travelers could face higher fares, although the merged airline has no such plans. But one rationale for any merger is to cut capacity. Source:The New York Times, June 7, 2010.

q.Explain how cost savings arising from a cut in capacity might bepassed onto travelers or boost producers' profits. Which might happen from this airline merger and why?

a. Cost cut is not passed on to travelers.

b. Cost cut is passed on to travelers.