Question

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. (Note: All values are hypothetical.)

Use the graph input tool to help you answer the following questions. You will not be scored 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 that Triple Sevens is charging $350 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(rises or falls)from__

rooms per night to___rooms per night. Therefore, the income elasticity of demand is(+ or -), hotel rooms at the Triple Sevens and airline trips between YVR and LAS are(complements or substitutes)

Triple Sevens is debating decreasing the price of its rooms to $325 per night. Under the initial demand conditions, you can see that this would cause its total revenue to(increase or decrese)Decreasing the price will always have this effect on revenue when Triple Sevens is operating on the(elastic or inelastic) portion of its demand curve.

Answer 1

Solution:

If average household income increases by 20% i.e. from $50000 to $60000, the demand curve shifts vertically upward by 20%. The horizontal and vertical intercepts of new demand curve are 600 and 600. The quantity of rooms demanded at the triple sevens rises from 150 to 250 rooms per night.

Income elasticity of demand = % change in quantity demanded/% change in income

                                               = [{(250-150)/150}*100]/20 = 3.33

Thus income elasticity of demand is positive.

When airline trips fare increases, the demand curve shifts vertically downward and quantity demanded decreases. The cross elasticity of demand is negative which means that hotel rooms at triple seven and airline trips are complements.

When price is decreased from $350 to $325 per room , the quantity demanded increases to 175. Total revenue = 325*175 = $56875. Before price change, total revenue = 350*150 = $52500

Thus total revenue will increase. The total revenue will increase always with decrease in price if triple sevens is operating on the elastic portion i.e. upper half portion of the demand curve.