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9. Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Peacock 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 Average American household income Roundtrip airfare from Los Angeles (LAX) to Las Vegas (LAS) Room rate at the Grandiose Hotel and Casino, which is near the Peacock Initial Value $50,000 per year $200 per roundtrip $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.

Graph Input Tool Market for Peacocks Hotel Rooms 500 450 400 350 300 D 250 O 200 150 100 50 Price (Dollars per room) 300 Quantit Demanded (Hotel rooms per night) 200 Demand Factors Average Income (Thousands of dollars) emand 50 Airfare from LAX to 200 (Dollars per roundtrip) 0 50 100 150 200 250 300 350 400 450 500 Room Rate at Grandiose (Dollars per night) QUANTITY (Hotel rooms) 250

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Peacock is charging $300 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 Peacock falls ▼ from rooms per night. Therefore, the income elasticity of demand is negative, meaning that hotel rooms at the rooms per night tor Peacock are a normal good If the price of an airline ticket from LAX to LAS were to increase by 10%, from $200 to $220 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Peacock fallsfrom price elasticity of demand is positive ▼ , hotel rooms at the Peacock and airline trips between LAX and LAS are complements ▼ . rooms per night to rooms per night. Because the cross- Peacock 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 tota revenue to decrease ▼ Decreasing the price will always have this effect on revenue when Peacock is operating on the inelastic ▼ portion of its demand curve.

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Law of demand states the quantity demanded of a good or a service decreases with an increase in its price level and vice-versa That is, price level and quantity demanded are inversely related to each other. For this reason, the demand curve is downward sloping. A movement along the demand curve occurs due to changes in the price level. However, a shift in the demand curve occurs when all other factors change, keeping the price level as fixed or constant. Suppose the average US household income is $50,000 per year. The roundtrip from SF to LAS is $200 per roundtrip, which is the price of complementary good. Also, the room rate at nearby hotel and casino (GD) is $250 per night, which is the price of substitute good. The given graph shows the market demand for hotel rooms of PC. It is a downward sloping line, which depicts an inverse relationship between price of a night in hotel and quantity demanded of hotel rooms PC hotel is currently charging S300 per night, where 200 hotel rooms are demanded. Suppose the average household income increases by 20% from $50,000 to $60,000 per year If a good is a normal good, the consumers will increase its demand when their income rises. A rise in income will increase the demand for all normal goods and the demand curve shifts rightwards at each price level Hence, the demand for their hotel rooms will increase and the demand curve will shift rightwards by 50 rooms at each price level. Consumers can stay for 50 more nights as they have S10,000 in excess to spend. Therefore, the quantity of rooms demanded will increase from 200 rooms per night to 250 per night. The price will remain the same at $300 per nightThe income elasticity (e) of demand measures the degree of responsiveness of a change in the quantity demanded due to a change in the income level of the consumer It is measured by the formula given below: % change in quantity demanded % change in income 250-200)200 x100 2090 2590 20% =11.25 Thus, the income elasticity of demand for hotel rooms is 1.25 . As the modulus value of elasticity is greater than I, the demand is elastic Complimentary good is a good which is consumed together with the good in question. There is a simultaneous consumption of the two goods For example, pen and refill are complementary goods. If the price of a relative complimentary good rises, the quantity demanded for that substitute good falls Suppose the price of an airline ticket from SF to LAs increases by 10% from $200 to $220 roundtrip. This would decrease the demand for airline tickets Recall that airline tickets (roundtrip) are a complementary service to hotel rooms because people must take flights to reach the hotels of PC. Thus, the demand for hotel room at hotel PC will decrease A decrease in demand will shift the demand curve to the left at each price level. Due to the shift, both equilibrium price and quantity decreasesLaw of demand states the quantity demanded of a good or a service decreases with an increase in its price level and vice-versa That is, price level and quantity demanded are inversely related to each other. For this reason, the demand curve is downward sloping. A movement along the demand curve occurs due to changes in the price level. However, a shift in the demand curve occurs when all other factors change, keeping the price level as fixed or constant. Suppose the average US household income is $50,000 per year. The roundtrip from SF to LAS is $200 per roundtrip, which is the price of complementary good. Also, the room rate at nearby hotel and casino (GD) is $250 per night, which is the price of substitute good. The given graph shows the market demand for hotel rooms of PC. It is a downward sloping line, which depicts an inverse relationship between price of a night in hotel and quantity demanded of hotel rooms PC hotel is currently charging S300 per night, where 200 hotel rooms are demanded. Suppose the average household income increases by 20% from $50,000 to $60,000 per year If a good is a normal good, the consumers will increase its demand when their income rises. A rise in income will increase the demand for all normal goods and the demand curve shifts rightwards at each price level Hence, the demand for their hotel rooms will increase and the demand curve will shift rightwards by 50 rooms at each price level. Consumers can stay for 50 more nights as they have S10,000 in excess to spend. Therefore, the quantity of rooms demanded will increase from 200 rooms per night to 250 per night. The price will remain the same at $300 per night

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> congrats you answered 10% of the problem

Jake Ottati Sun, Feb 6, 2022 6:47 PM

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