Question

9. 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
Roundtrip airfare from New York(JFK) to Las Vegas (LAS)	$100 per roundtrip
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.

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Big Winner 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 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 an airline ticket from JFK to LAS were to increase by 10%, from $100 to $110 roundtrip, 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 airline trips between JFK and LAS 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. 

Answer 1

1) the quantity of rooms demanded at big winner rises from 150 rooms per night to 200 per night . therefore , the income elasticity of demand is [%change in Qd/%change in income=33.3/20] =1.67. the hotel rooms at big winner are normal goods

2)while all other demand factors initial values the elastic of demand at big winner falls from 150 rooms per night to 50 rooms night . cross price elasticity of demand is [ %change in Qd/%change in price of tickets =-33.3/20]=-1.67

, hotel rooms the big winner and airline between IAX and IAS are complements.

3) you can see that this total revenue to increase.   decreasing the price will always .... as on the elastic portion to its demand curve .