7. Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Big Winner 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 Round trip airfare from Los Angeles (LAX) to Las Vegas (LAS) $100 per round trip Room rate at the Lucky Hotel and Casino, which is near the Big Winner $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. 0 50 100 150 200 250 300 350 400 450 500 500 450 400 350 300 250 200 150 100 50 0 PRICE (Dollars per room) QUANTITY (Hotel rooms) Demand Graph Input Tool Market for Big Winner's Hotel Rooms Price (Dollars per room) 200 Quantity Demanded (Hotel rooms per night) 300 Demand Factors Average Income (Thousands of dollars) 50 Airfare from LAX to LAS (Dollars per round trip) 100 Room Rate at Lucky (Dollars per night) 250 For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Big Winner is charging $200 per room per night. If average household income increases by 10%, from $50,000 to $55,000 per year, the quantity of rooms demanded at the Big Winner from rooms per night to rooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Big Winner are . If the price of a room at the Lucky were to decrease by 10%, from $250 to $225, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner from rooms per night to rooms per night. Because the cross-price elasticity of demand is , hotel rooms at the Big Winner and hotel rooms at the Lucky are . Big Winner 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 Big Winner is operating on the portion of its demand curve.

050100150200250300350400450500500450400350300250200150100500PRICE (Dollars per room)QUANTITY (Hotel rooms)Demand  

Graph Input Tool

1. Let us assume that there are two visitors, A and B, in an amusement park. The demand curve for the visitors facing the amusement park are as follows.

P_A= 5 – 2Q_A

P_B= 2.5 – 0.5Q_B

Marginal cost (MC) to serve each visitor is equal to $1.

a. If the amusement park decides to set the price using two-part tariff, given the demand curve

P=6 – 2.5Q and MC =$1, how much is the equilibrium P and Q

b. Calculate the maximum upfront fee the park could charge each visitor

Management of Wildhorse Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $226,550 and will generate cash flows of $64,750 over each of the next six years. If the cost of capital is 12 percent, what is the MIRR on this project? (Round intermediate calculations to 3 decimals and final answers to 1 decimal places, e.g. 15.5%. Do not round factor values.)

Management of Sunland Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $213,550 and will generate cash flows of $76,750 over each of the next six years. If the cost of capital is 14 percent, what is the MIRR on this project? (Round intermediate calculations to 3 decimals and final answers to 1 decimal places, e.g. 15.5%. Do not round factor values.)

There are a number of national and state parks available to tourists. Create a Park class which should have name of park, location, type of (i.e., national, state, local) facility, fee, number of employees, number of visitors recorded for the past 12 months, and annual budget data members. Write instance methods that: a) Return a string representing name of the park, the location and type of park. b) Return a string representing the name of the park, the location and facilities available c) Compute cost per visitor based on annual budget and the number of visitors during the last 12 months. d) Compute revenue from fees for the past year based on number of visitors and fee.

New York City is the most expensive city in the United States for lodging. The mean hotel room rate is $204 per night (USA Today, April , ). Assume that room rates are normally distributed with a standard deviation of $55.

a. What is the probability that a hotel room costs $225 or more per night (to 4 decimals)?

b. What is the probability that a hotel room costs less than $140 per night (to 4 decimals)?

c. What is the probability that a hotel room costs between $200 and $300 per night (to 4 decimals)?

d. What is the cost of the 20% most expensive hotel rooms in New York City? Round up to the next dollar.

Superserv Inc. intends to acquire new equipment for $10 million and has an estimated life of 5 years and a salvage value of $800K.  The new equipment is expected to allow additional annual sales of $5 million over the next 5 years.  The associated additional annual operating costs are expected to be $3 million, while the interest on debt issued to finance the project is $1.5 million.   In addition, working capital will increase by $1.2 million at the outset. The project's cost of capital is 10%.  The firm's tax rate is 40%.  The annual depreciation charge on the new machine is $2 million.  What is the project's NPV? ($-2.5753m)

Solve this without excel, please.

suppose that the hotel acts as a monopolist whose manager chooses what quantity q of rooms to offer for rent. We want to determine the hotel’s optimal choice of quantity on game days.

Consider a hotel which can supply an unlimited number of hotel rooms at the constant marginal cost c = 20 per room per night, so that the hotel’s total cost function is given by C(q) = 20q.1 Assume that demand for hotel rooms in Tallahassee takes two possible values: on game days, demand is described by the demand curve q = 100 − p, while on non-game-days demand is described by the demand curve q = 60 − 2p.

Find the hotel’s total revenue on game days as a function of its quantity choice q. (Recall that total revenue equals price times quantity, where in this case price is described by the inverse demand curve.)

(e) Assuming the hotel maximizes profit, show that it will supply quantity q = 40 on game days.

(f) What will be the hotel price on game days? And what will be the hotel’s game-day profits?

(g) Still focusing on game days, graphically illustrate the demand curve, the hotel’s marginal revenue curve, and the hotel’s marginal cost curve. Indicate the hotel’s optimal quantity and price choices on the graph.

Morrison Hotel uses its banquet room to host parties, dinner dances, and business meetings. The hotel serves meals and provides a variety of services for each event. A local consultant analyzed recent cost data and estimated the total cost function per event to be as follows: Y = $1,000 + $9.00 x Assuming that Y represents total cost and x equals the number of guests, use this equation to answer the following questions:

a. If the hotel charges $25.00 per guest, how many guests must attend for the hotel to break even at each event?

b.  If the hotel charges $28.00 per guest, how many guests must attend for the hotel to break even at each event?

c..  If the hotel charges $28.00 per guest, would you advise this hotel to host events for 50 or fewer guests? Why or why not?

Durango Mountain Bike Company wants to open a bicycle repair shop in a suburb of a major metropolitan area. The industry association estimates that 20 percent of bicycles are repaired by similar service companies and that the average owner spends $100 per bicycle on maintenance each year. The census and local chamber of commerce data indicate that there are 10,000 bicycles in the county. Three other competitors exist within a twenty-five-mile radius of the proposed business location. Based on a consumer survey, the owners believe that they can capture 30 percent of the market in the first year of operation. Based on these data, address the following requirements:

a.  What is the potential number of bicycles likely to be commercially repaired?

b. What is the total potential bicycle repair revenue available in the market?

c. How much revenue can Durango Mountain Bike expect to generate?