Does altitude affect fuel economy?

There are two aspects here - engine efficiency and vehicle efficiency.

Normally aspirated engines do see higher fuel economy (and lower peak power) at altitude. This is because the throttle has to be open wider to get the same power, and thus pumping losses are reduced.

This is not true of diesels, though, since diesel power is determined by amount of fuel injected, and there's no throttle plate.

Atkinson cycle engines already do a lot to reduce pumping losses; I don't know if that effect reduces or eliminates the efficiency benefits from operating at higher altitude.

As for vehicle efficiency, at higher speeds vehicles are always more efficient in lower density air.

 

Yes, you are wrong. It is not the altitude that is compensated for.

Ecological aspects control modern cars, which are embedded in the engine control unit. The stoichiometric number says that to burn a unit of fuel mass, 14.7 more air mass is needed.

The proportion of 14.7:1 is observed so that the output is as few harmful substances as possible.

As the altitude increases, the air pressure decreases and the air density decreases, the number of oxygen molecules for burning a given volume of fuel decreases at altitude.

Less air (oxygen) enters the engine and the ECU, following environmental aspects, regulates the reduction in fuel supply. Engine power drops. To climb to a height at an altitude of 3,000 feet, the pedal must be pressed much harder so that the throttle valve opens at a greater angle, compensating for the decrease in oxygen in the air volume.

 

Am I on the right track: at higher altitudes each cylinder’s volume is unchanged, but the air is thinner, hence less gasoline is needed to achieve proper fuel/air ratio?

so better mpg but less power?

 

Yep, lower pressure means less air per volume. It results in a faux displacement reduction that leads to less fuel burned but lower power. It also means lower effective compression ratio, which is why lower octane can be used. Except in engines with chargers(turbo, super). Those push enough air in to keep pressure in the cylinder the same no matter the elevation.

The lower pressure also lowers air resistance.

Hybrids could be a special case depending on driving style. Lower engine output can be compensated by increased motor output. Which leads to more gas burned to recharge the battery.