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 Los Angeles (LAX) to Las Vegas (LAS)	$250 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 $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 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 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 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 LAX and LAS are _______ .

Big Winner 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 Big Winner is operating on the _______ portion of its demand curve. 

Answer 1

To solve the first question :-

1)In the graph Input tool , under the Demand factors tab , change the value of average house hold income from 50 to 55.

You will observe a change in the graph and also in the Quantity demanded box under the "Market for Peacock Hotel Rooms "

Let the value in "Quantity Demanded " be x ( I don't have the graph input tool , so you substitute the value under the quantity demanded as x)

Note that the Quantity of rooms demanded in initial conditions was 200 .

Income elasticity of demand = percentage change in quantity demanded / percentage change in income

Percentage change in Quantity demanded = [(x-200)/200]*100

percentage change in income = 10 .(Given in the question )

SO , Income elasticity of demand = [{(x-200)/200]/100}]*100

calculate it's value by substituting the value of x.

If the income elasticity of demand is POSITIVE , Then the the hotel rooms at Peacock are Normal Goods

If it is NEGATIVE , then the hotel rooms are Inferior goods.

Second Question :-

IF THE PRICE OF AIRLINE TICKET FROM LAZX TO LAS INCREASED BY 20% FROM $250 TO $300 , QUNTITY OF ROOMS DEMANDED AT BIG WINNER FALLS /RISE FROM 200 ROOMS PER NIGHT TO Y ROOMS PER NIGHT. *FALLS IF Y<200 OR RISES IF Y>150.

FORMULA TO CALCULATE CROSS-PRICE ELASTICITY ;

%CHANGE IN QUANTITY DEMANDED/%CHANGE IN PRICE

If the cross price elasticity of demand is negative then the hotel rooms are compliments

If cross price elasicity is positive , then the hotel rooms are un-related.

3) From the initial graph , under initial conditions ,

when the price of hotel room , decreases the demand for it increases

so , the REVENUE INCREASES

Decreasing the price will have this effect as long as it is operating on the elastic portion of the demand curve.