Question

Use the following graph to calculate the elasticity of 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)	$200 per roundtrip
Room rate at the Lucky Hotel and Casino, which is near the Big Winner	$200 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 $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 an airline ticket from JFK 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 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. rises, from 300 to 325

Additional income = 55000 - 50,000 = 5000

Cost of 1 room = 200

Additional room that can be purchased = 5000/200 = 25

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

% change in quantity demanded = (325 - 300)/300 X 100 = 25/300 x 100 = 8.33%

% change in income = 10%

Income Ed = 8.33/10 = 0.83

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

4. falls, 300 to 270

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

% change in quantity demanded = (270 - 300)/300 X 100 = - 10%

% change in price of airplane ticket = 10%

Cross price elasticity = - 10/10 = - 1

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

7. increases; elastic