Question

 9. Application: Elasticity and hotel rooms

 The following graph input tool shows the dally 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      Initial Value

 Average American household income $50,000 per year

 Roundtrip airfare from New York (JFK) to Las Vegas (LAS) $200 per roundtrip

 Room rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens $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.

 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.

 If average household income increases by 20%, from $50,000 to $60,000 per year, the quantity of rooms demanded at the Triple Sevens _______  from _______ rooms per night to _______  rooms per night. Therefore, the income elasticity of demand is _______  ,meaning that hotel rooms at the Triple Sevens are _______ 

 If the price of an airline ticket from JFK to LAS were to increase by 10%, from $200 to $220 roundtrip, while all other demand factors remain at their Initial values, the quantity of rooms demanded at the Triple Sevens _______  from _______  rooms per night to_______  rooms per night. Because the cross-price elasticity of demand is _______, hotel rooms at the Triple Sevens and airline trips between JFK and LAS are _______ .

 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 _______. Decreasing the price will always have this effect on revenue when Triple Sevens is operating on the _______  portion of its demand curve.

Answer 1

Please note that few information in the question is missing. I have tried to guess the answer to my best capacity. Please check at the tool.

If average household income increases by 20%, from $50,000 to $60,000 per year, the quantity of rooms demanded at the Triple Sevens rises from $300 per night to $ _____ per night. Therefore, the income elasticity demand is positive, meaning that hotel rooms at the Triple Sevens are a normal good.

Note: You need to find the changed demand from the tool. I guess it should be either 350 or 400. Please check.

If the price of an airline ticket from JFK to LAS were to increase by 10%, from $200 to $220 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens falls from 200 to ___rooms per night. Because the cross-price elasticity of demand is negative, hotel rooms at the Triple Sevens airline trips between JFK and LAS are complements.

Note: You need to find the changed demand from the tool. I guess it should be 150. Please check.

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.

When the demand is elastic, a decrease in price increases total revenue and vice versa. For a linear demand curve, elasticity = 1 at its mid-point. On the segment above the mid-point, elasticity of demand > 1 (elastic) and below the mid-point, the elasticity is < 1 (inelastic). Since, the initial price is in elastic segment reducing it to $275 will increase the revenue.