Question

Suppose Mark’s brother works for an airline as a union representative for the machinists working on the planes.  Two years ago, there was a forced landing that severely injured five people on the flight of one of the airline’s passenger planes.  

While watching television at Mark’s house, he notices his brother is rather depressed. Mark asks him what is wrong.  

“Remember that crash of Flight 3183 to Buffalo a while back?” the brother asks.  

Mark shakes his head in the affirmative.  “Yeah. You were worried whether or not it would be blamed on your workers for a mechanical failure.”

The brother sighs. “Well, we got word today that the NTSB is going to find that one of my guys was at fault.  They’re going to announce their findings by the end of the week.”  

Mark nods while returning his attention to the television.  The next day, Mark picks up the phone to call his broker, selling all the shares he has in the airline.  

Using supply/demand analysis, what would we expect to happen to the share price of the airline once the NTSB announcement is made that the airline was at fault?  Should Mark have reacted the way he did? Discuss.  

Answer 1

We would expect the share price of the airline to FALL once the NTSB announcement is made that the airline was at fault. Following the official announcement, shareholders will sell their shares, thus implying a reduced demand for the airline shares in the market. This reduced demand creates a sag in the prices, leading to a fall in the price of shares. Hence, Mark reacted the right way.