The following graph input tool shows the daily demand for hotel rooms at the Pea
ID: 1142497 • Letter: T
Question
The following graph input tool shows the daily demand for hotel rooms at the Peacock Hotel and Casino in Las Vegas, Nevada. To help the h management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. The factors, along with the values corresponding to the initial demand curve, are shown in the following table and alongside the graph input tool Demand Factor Average American household income Roundtrip airfare from New York (JFK) to Las Vegas (LAS) Room rate at the Grandiose Hotel and Casino, which is near the Peacock Initial Value $40,000 per year $100 per roundtrip $200 per night Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.Explanation / Answer
Answer:
1- If average household income increased by 25%, from $40,000 to $50,000 per year, the quantity demanded of rooms at the Peacock rises from 350 rooms per night to 400 rooms per night. Therefore the income elasticity of demand is positive, meaning that hotel rooms at the Peacock are a normal good.
Income elasticity of demand shows the change in demand due to the change in income of the consumer. A commodity is said to be normal if its demand increases with increase in consumers’ income
2- If the price of a room at the grandiose were to decrease by 20%, from $200 to $160, while all other demand factors remain at their initial values, The quantity of rooms demanded at the peacock falls from 350 rooms per night to 300 rooms per night. Because the cross- price elasticity of demand is positive, hotel rooms at the peacock and hotel rooms at the Grandiose are substitutes.
The cross price elasticity of demand is positive because increase in price of one commodity lead to increase in quantity demanded of another commodity and decrease in price of a commodity leads to decrease in demand for another commodity. peacock hotel and grandiose are substitute to each other so decrease in price of grandiose hotel rooms will lead to reduction in the demand for peacock hotel rooms.
3- Peacock is debating decreasing the price of its rooms to $125 per night. Under the initial demand conditions, You can see that this would cause its total revenue to increase. Decreasing the price will always have this effect on revenue when peacock is operating on the elastic portion of its demand curve.
Demand is said to be elastic when change in price causes change in quantity demanded of a commodity.
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