Question

Suppose that oil fouls the beaches along the Florida panhandle. Vacationers are the primary customers of the hotels along the panhandle. The oil _____ the price of a hotel room and _____ the quantity of hotel rooms rented

Answer 1

Solution:

As the vacationers are primary customers of hotels along the panhandle, such fouled beaches due to oil will not provide customers the incentive to enjoy vacation there as it becomes less attractive for them. This lack of attraction will hence, shift the demand curve for hotel rooms to the left. Finally, at new equilibrium, the price and quantity of rooms rented, both will fall.

So, the oil decreases the price of hotel room and decreases the quantity of hotel rooms rented.