Question

- Two hotels that are in different markets and do not compete with one another noted the following data during a recent year:

 Hotel E-Z Sleep
o When the nightly rate was $135 per room, 700 rooms per

month were rented
o When the nightly rate was increased to $165 per room, 600

rooms per month were rented

 Hotel Nice Night
o When the nightly rate was $200 per room, 800 rooms per

month were rented
o When the nightly rate was increased to $300 per room, 500

rooms per month were rented - Do the following for each hotel:

•  Calculate the price elasticity of demand using the midpoint method

•  Calculate total revenue before and after the price change

•  Determine whether demand is inelastic, elastic, or unitary elastic

•  Was increasing price the right thing to do?

•  What are some other factors that may have influenced the data?

•  Should the hotels consider increasing the price in the future?

Answer 1

Given,

For hotel E-Z sleep:

• Price = 135, Qty = 700
• Price = 165, Qty = 600

For hotel Nice night:

• Price = 200, Qty = 800
• Price = 300, Qty = 500

1. Price elasticity of demand =

Hotel E-Z ; Price elasticity = 0.67

Hotel Nice night ; Price elasticity = 1.15

2. Hotel E-Z;

Revenue (Before) = Price * quantity = 135*700 = 94,500

Revenue (After) = Price * quantity = 165*600 = 99,000

Hotel Nice nights ;

Revenue (Before) = Price * quantity = 200*800 = 160,000

Revenue (After) = Price * quantity = 300*500 = 150,000

3. Hotel E-Z; Elasticity = 0.67,Relatively inelastic demand as Elasticity <1. Thus P >Q

Hotel Nice nights ; Elasticity = 1, Relatively elastic demand as Elasticity >1. Thus P < Q

4.

Yes, For Hotel E-Z its the right thing to do as demand do not alter much with price change, thus their revenue increased.

No, For Hotel Nice nights as their customers are highly price elastic, little change in price have a greater impact on quantity, thus their revenue decreases.