9. Application: Elasticity and hotel rooms The following graph input tool shows

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 $250 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 Graph Input Tool Market for Triple Sevens's Hotel Rooms 500 450 Price (Dollars per room 300 Quantity Demanded 200 250 200 150 100 Hotel rooms per Demand Factors 0 60 100 150 200 250 300 350 00 450 00 Average Income (Thousands of dollars) Airfare from JFK to LAS 50 QUANTITY (Hotel rooms) 250 Dollars per roundtrip) Room Rate 200 Exhilaration (Dollars per night) For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Triple Sevens is charging $300 per room per night

Explanation / Answer

Part A

If the avarage household income increases by 20%, from $50,000 to $60,000 per yea, the quantity of rooms demanded at the triple sevens rises 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.

Part B

if the price of an airline 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 decreases from 200 rooms per nights to 150 rooms per night. Because the cross price elasticity of demand is negative ,hotel rooms at the Triple Sevens and airline trips between JFK and LAS are compliments

Part C

Triple sevens is debating decreasing the price of its rooms to $275 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 Triple Sevens is operating on the Elastic portion of its demand curve.

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