Question

7. Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Big Winner 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 Initial Value Average American household income $50,000 per year Round trip airfare from Los Angeles (LAX) to Las Vegas (LAS) $100 per round trip Room rate at the Lucky Hotel and Casino, which is near the Big Winner $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. 0 50 100 150 200 250 300 350 400 450 500 500 450 400 350 300 250 200 150 100 50 0 PRICE (Dollars per room) QUANTITY (Hotel rooms) Demand Graph Input Tool Market for Big Winner's Hotel Rooms Price (Dollars per room) 200 Quantity Demanded (Hotel rooms per night) 300 Demand Factors Average Income (Thousands of dollars) 50 Airfare from LAX to LAS (Dollars per round trip) 100 Room Rate at Lucky (Dollars per night) 250 For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Big Winner is charging $200 per room per night. If average household income increases by 10%, from $50,000 to $55,000 per year, the quantity of rooms demanded at the Big Winner from rooms per night to rooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Big Winner are . If the price of a room at the Lucky were to decrease by 10%, from $250 to $225, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner from rooms per night to rooms per night. Because the cross-price elasticity of demand is , hotel rooms at the Big Winner and hotel rooms at the Lucky are . Big Winner is debating decreasing the price of its rooms to $175 per night. Under the initial demand conditions, you can see that this would cause its total revenue to . Decreasing the price will always have this effect on revenue when Big Winner is operating on the portion of its demand curve.

050100150200250300350400450500500450400350300250200150100500PRICE (Dollars per room)QUANTITY (Hotel rooms)Demand  

Graph Input Tool

Market for Big Winner's Hotel Rooms
	Price (Dollars per room)
	Quantity Demanded (Hotel rooms per night)

Demand Factors
	Average Income (Thousands of dollars)
	Airfare from LAX to LAS (Dollars per round trip)
	Room Rate at Lucky (Dollars per night)

Answer 1