As the manager of a local hotel chain, you have hired an econometrician to estim
ID: 1226602 • Letter: A
Question
As the manager of a local hotel chain, you have hired an econometrician to estimate the demand for one of your hotels (H). The estimation has resulted in the following demand function: QH = 2,000 - PH - 2.5PC - 2.5PSE+ 0.9POH + 0.02M, where PH is the price of a room at your hotel, PC is the price of concerts in your area, PSE is the price of sporting events in your area, POH is the average room price at other hotels in your area, and M is the average income in the United States. What would be the impact on your firm of:
a. A $500 increase in income?
b. A $10 reduction in the price charged by other hotels?
c. A $7 increase in the price of tickets to local sporting events?
d. A $5 increase in the price of concert tickets, accompanied by an $8 increase in income?
Explanation / Answer
a) A $500 increase in income:
In demand function, the coefficient of M ( average income) is positive which signifiies if there any increase in income takes place, that would lead to increase in demand. Hence with increase in income by 500 there will be incease in demand by 0.02% of change in income
b) A $10 reduction in the price charged by other hotels:
In demand function, the coefficient of POH( price charged by other hotels) is positive which signifiies if there any decrease in price by other hotels takes place, that would lead to decrease in demand of the hotel room. Hence with decrease in POH by 10 there will be decrease in demand by 0.9% of change in POH
c) A $7 increase in the price of tickets to local sporting events:
In demand function, the coefficient of PSE( price of local sport ticket) is negative which signifiies if there any increase in price of sport ticket takes place, that would lead to decrease in demand of the hotel room. Hence with increase in PSE by 7 there will be decrease in demand by 2.5% of PSE
d) A $5 increase in the price of concert tickets, accompanied by an $8 increase in income:
It would have both positive and negative effect. It will increase by 0.02% of change in income and will reduce yby 2.5% of PCE.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.