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   Initial Value

 Average American household income $40,000 per year

 Roundtrip airfare from Los Angeles (LAX) to Las Vegas (LAS) $200 per roundtrip

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

 For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Triple Sevens is charging $200 per room per night.

 If average household income increases by 50%, from $40,000 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 a room at the Exhilaration were to decrease by 20%, from $200 to $160, 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 hotel rooms at the Exhilaration are _______ .

 Triple Sevens 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 Triple Sevens is operating on the _______  portion of its demand curve.

Answer 1

#If average household income increases by 50% from $40000 to $60000 per year, the quantity per year, the quantity of rooms demanded at the Triple Sevens Increases from 300 rooms per night to 450 roome per night.Therefore ,the income elasticity of demand is positive,meaning that hotel rooms at the Triple Sevens are normal goods.

( Reason------In case of a normal good ,there is positive relationship between price and income, when income increases, the quantity demanded of good also increases. So when income increases by 50% ,the quantity of rooms in triple seven also increases by 50%, that is 300×50%=150 rooms, as formula for income elasticity of demand = %age change in quantity demanded / percentage change in income, if answer is positive, the good is normal.)

#If the price of room at the Exhileration were to decrease by 20% ,from $200 to $ 160,while all other demand factors remain at their initial values,the quantity of rooms demanded at Triple seven decreases from 300 rooms per night to 240 rooms per night.,because the cross elasticity of demand is positive , hotel rooms at Triple Seven and hotel rooms at the Exhileration are substitute goods.

( Reason---- as both hotels are substitute to each other, the decrease in price of substitute hotel ( Exhileration ) will decrease the demand for given hotel ( Triple seven).& As per Cross price elasticity of demand ( percentage change in quantity demanded of good 1 / percentage change in price of good 2), when price of good 2 ( Exhileration ) decreases by 20%,the quantity demanded Of good 1( triple seven) also decreases,by 20% ,which shows there is positive relation between two and both are substitute goods)

#Triple seven 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 decrease .​​​​Decreasing the price will always have this effect on revenue when Triple Seven is operating on the inelastic portion of its demand curve.

( Reason-Initial expenditure =P×Q

200×300=$60000

New expenditure = p¹×Q¹

P¹-175$,. Q¹=. 337•5 * { % change in price =(25/200)100} =12•5%

As per inverse relationship under law of demand ,the new quantity ( Q1) will increase by 12•5 %, so Q¹= 300+12•5%of 300=337•5}

so P¹×Q¹= 175×337•5=59062•5$

When with the fall in price , total expenditure also ,decreases ,the price Ed is said to be inelastic ( As per Expenditure method of Price Ed)