The following graph input tool shows the daily demand for hotel rooms at the Tri
ID: 1142728 • Letter: T
Question
The following graph input tool shows the daily demand for hotel rooms at the Triple Sevens Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. These demand 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 San Francisco (SFO) to Las Vegas (LAS) Room rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens Initial Value $50,000 per year $250 per roundtrip $250 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 Graph Input Tool Market for Triple Sevens's Hotel Rooms 500 450 400 350 300 250 200 O 150 Price 300 Dollars per room) Quantit Demanded (Hotel rooms per night) 200 Demand Factors Average Income Thousands of dollars) 0: and 50 Airfare from SFO to LAS (Dollars per roundtrip) 50 250 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Hotel rooms) Room Rate at 250Explanation / Answer
The question basically focusses on the Income elasticity and Cross elasticity of demand.
Income Elasticity - The responsiveness of the quantity demanded to the change in Income. How much the quantity demanded will change with the one unit change in income.
Income Elasticity = (Quanitty Demanded / Income) x (Income/Quantity Demanded)
Cross Elasticity - The responsiveness of the quantity demanded to the change in the price of other commodities. How much the quantity demanded will change with the one unit change in the price of other commodities.
Cross Elasticity = (Quanitty Demanded / Price of another commodity) x (Price of another commodity/Quantity Demanded)
1. If the average household's income increases by 10% from $50000 to $55000, the quantity of rooms demanded at Triple Sevens will rise from 200 to 220, and Income elasticity is positive. Therefore it's a normal good. because -
Since Prices are constant,
If at the income of $50000 the number of rooms booked = 200
At the Income of $55000 the number of rooms booked = (200/50000) x 55000 = 220
Income Elasticity = (20/5000) x (50000/200) = 1.
2. If the price of an airline ticket from JFK to LAS were to increase by 20%, from $250 to $300 round trip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens will fall from 200 to 160. Because the cross elasticity is negative both the things are complements.
Cross elastcity = (-40/50) x (250/200) = -1
3. If Triple Sevens decreases the price to $275 then the Total Revenue would Decrease. This effect will hold when Triple Seven is operating on the elastic portion.
At the price of 300 the quantity = 200
A the price of 275 the quantity = (200/300) x 275 = 183
TR = P x Q
TR initially was 300 x 200 = $60000
TR now would be 275 x 183 = $50325
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