Question

Background
Hotel One is one of the two hotels serving Dayville, a small town in the US Midwest. Fifty percent of its customers are out-of-town visitors to the local college, 30 percent are visiting Dayville for business purposes, and the remaining 20 percent of Hotel One’s customers are leisure travelers. The hotel is within one mile from campus, approximately four miles from the city center, and eight miles from the airport. It is easy to reach by car, taxi, or city bus. You are a manager of Hotel One. Your facility consists of 150 rooms, all of which are standard rooms with two double beds. Your only competitor in Dayville, The Other Hotel, has fewer rooms (100), but 20 of their rooms are luxury suites with king beds and a sofa couch (the other 80 are standard rooms with two double beds). This is the extent of the information provided to you at this point.

Assignment
In order to better understand your unit’s operating environment, you are asked to provide your estimate of the demand equation that would account for various factors that affect your customer traffic. This will be done by using regression techniques. The first step in estimating a demand equation is to determine what variables will be used in the regression. Please provide detailed answers to the following questions:
1. What do you think should be the dependent variable in your demand equation? What units of measurement for that variable are you going to adopt? Please provide a detailed explanation for these choices.
2. Please request information about up to five independent (explanatory) variables for your demand equation. For each variable you request, (i) provide reasons why you expect it to be
important for your analysis and (ii) explain the expected sign of the relationship between the proposed independent variable and your proposed dependent variable.
3. Show the exact demand equation you are proposing to estimate.

Answer 1

 

Hotel One	number of customer
Business purpose	30%
Leisure	20%
Other	50%

numbepreferance of r of rooms	Hotel One	Hotel Other
	150 (Standard Double bed)	100(80 standard, 20 suite)

	distance
city center	8
airport	4
campus	1

1) what do you think should be the dependent variable in the demand equation? what units of measurement for that variable are you going to adopt? please provide a detailed explanation for these choices?

Sol:- Demand is actually the ability or willingness of a person to spend on a particular product or service at that particular time. There can be many factors affecting the demand function such as:-

• price of goods or services (P) : Price of the service is one of the main variable as demand of a product or service is the willingness a of a customer to pay for it.
• Price of related goods or Services (Pr):- As there are only two hotels, The price of other hotel room directly affect the demand of our services as product offered by us is almost similar to the other hotel
• Expected future price of the product (Pe) :- Expected future price is not a very much important variable as it can not be calculated in absolute term.
• Income of consumers (M) :- Income of a customer is directly proportional to the demand of our services
• number of customers in the market (N) :- Number of customer is directly proportional to the demand curve.
• preference of customer. (A) :- Preference can be derived out of many factors such as marketing, cleanliness of the room, word of mouth from our previous customer etc but this may play a crucial role in our demand curve, but calculating it in absolute term is quite difficult.

The above mentioned factors can be classified as dependent variable.

The General demand function by accounting the above variables can be formulated as

simple demand function will look like:

where as : K is the constant

the numbers/constant allocated to each variable is the weight assign to each variable. This assignment of constants/numbers are random out of descrition.

2. Please request information about up to five independent (explanatory) variables for your demand variables for your demand equation. For each variables you request (1) provide reason why you expect it to be important for your analysis and (2)explain the expected sign of the relationship between the proposed independent and proposed dependent variables.

Sol: If we look at the above question, we can easily figure out the five variables and explanation of the demand equation:-

• price of goods or services (P) : Price of the service is one of the main variable as demand of a product or service is the willingness a of a customer to pay for it.
• Price of related goods or Services (Pr):- As there are only two hotels, The price of other hotel room directly affect the demand of our services as product offered by us is almost similar to the other hotel
• Expected future price of the product (Pe) :- Expected future price is not a very much important variable as it can not be calculated in absolute term.
• Income of consumers (M) :- Income of a customer is directly proportional to the demand of our services
• number of customers in the market (N) :- Number of customer is directly proportional to the demand curve.
• preference of customer. (A) :- Preference can be derived out of many factors such as marketing, cleanliness of the room, word of mouth from our previous customer etc but this may play a crucial role in our demand curve, but calculating it in absolute term is quite difficult.

Dependent Variables are the variables directly related to the demand curve of demand equation. like if that variable grow, the demand for our service will grow. Independent variable are the variables are not directly proportional to our demand curve or demand equation.

Following are the example of dependent variable:-

• Price of goods or Services (P)
• Price of related gods or services (Pr)
• Number of customers in the market (N)
• Income of consumers (M)

Following are the examples of independent variable:-

• Preference of customer (A)
• Expected future price of the product (Pe)

(3) Show the exact demand you are proposing to estimate?

Sol:-

where as : K is the constant

Price of goods or Services = P

Price of related gods or services = Pr

Number of customers in the market = N

Income of consumers = M

Preference of customer = A

Expected future price of the product = Pe