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	$50,000 per year
Roundtrip airfare from Los Angeles (LAX) to Las Vegas (LAS)	$250 per roundtrip
Room rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens	$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.

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Triple Sevens is charging $300 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 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 an airline ticket from LAX to LAS were to increase by 20%, from $250 to $300 roundtrip, 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 airline trips between LAX and LAS are _______ 

 Triple Sevens is debating decreasing the price of its rooms to $275 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

1. rises, from 200 to 220

Additional income = 55000 - 50,000 = 5000

Cost of 1 room = 250

Additional room that can be purchased = 5000/250 = 20

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

% change in quantity demanded = (220 - 200)/200 X 100 = 10%

% change in income = (55000 - 50000)/50000 x 100 = 10%

Income Ed = 10/10 = 1

3. Normal goods because increase in income increases demand of hotel rooms

4. falls, 200 to 150

5. Cross price elasticity = % change in quantity demanded / % change in price of other good

% change in quantity demanded = (150 - 200)/200 X 100 = -25%

% change in price of airplane ticket = 20%

Cross price elasticity = -2520 = - 1.25

6. Complements because they are jointly used. To reach hotel, person has to travel from airplane.

7. increases; elastic