9. Application: Elasticity and hotel rooms The following graph input tool shows
ID: 1146759 • Letter: 9
Question
9. Application: Elasticity and hotel rooms 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 New York (JFK) to Las Vegas (LAS) Room rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens Initial Value $50,000 per year $200 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.Explanation / Answer
1) When average houshold income increases by 20%, the quantity of rooms demanded increases from 200 rooms per night to 250 rooms per night. Therefore, the income elasticity of demand is positive, meaning that hotel rooms at the triple sevens are normal good.
As percentage increase in quantity of rooms demanded is more than the percentage increase in income, means, positive income elasticity.
2) If the price of an airline ticket from JFK to LAS were to increase by 10% while all other demand factors remain at their values, the quantity of rooms demanded at the Triple sevens falls from 200 rooms per night to 150 rooms per night. Because cross-price elasticity of demand is negative, hotel rooms at the Triple sevens and airline trips between JFK and LAS are complements.
A good is complement if fall/rise in the price of one good increases/decreases the demand of other.
3) Triple sevens is debating decreasing the price of its rooms to $275 per night. Under the initial demand condition, you can see that this would cause its total revenue to increase. Decreasing the price will always have this effect on revenue when Triple Sevens is operating on the elastic portion of its demand curve.
revenue before change = 200*300 = 60000
revenue after chane = 225*275 = 61875
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