You are the manager of a high end hotel in Las Vegas and the owner of the hotel

Question

You are the manager of a high end hotel in Las Vegas and the owner of the hotel is concerned with revenue generation from room service and concierge services. The owner believes that the prices for both types of service should be raised in order to increase their revenue. You calculate the following

The owner wants your opinion on what she should do. What do you recommend?

Room Service Concierge Service Price Elasticity of Demand -0.8 -1.3 Income Elasticity 0.4 0.6 Cross-Price Elasticity 0.05 0.1

Explanation / Answer

Price elasticity of demand is the measure of responsiveness of change in the quantity of a product demanded as its price changes. It is the ratio of percentage change in the quantity demanded to the percentage change in its price.

For a product X, the cross price elasticity of its demand is a measure of responsiveness of change in its demand for any given change in the price of its related product Y.

For a product X, the income elasticity of its demand is a measure of responsiveness of change in its demand for any given change in the income of the consumers.

Now one is certain that a rise in price will reduce the quantity of both type of services demanded by the consumers. But see that Price elasticity of demand and income elasticity of demand for room services is less than 1. Note that total revenue rises with a rise in price, when the price elasticity is less than unity .This implies total revenue rises if prices are raised when the demand is relatively inelastic. This is true since a fall in the quantity will be much smaller than the rise in price so that total revenue will rise.

So if price of room service is raised, total revenue will be increased.

The same is not true for Concierge Service which has more elastic demand (elasticity greater than 1). Note that total revenue falls with a rise in price, when the price elasticity is more than unity .This implies total revenue falls if prices are raised when the demand is relatively elastic. Hence, a fall in the quantity will be much larger than the rise in price so that total revenue will fall.

So if price of concierge service is raised, total revenue will be decreased.

Recommendation - Increase the price of room service and decrease the price of concierge service to raise revenue.

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