Question

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	Initial Value
Average American household income	$50,000 per year
Roundtrip airfare from Los Angeles (LAX) to Las Vegas (LAS)	$100 per roundtrip
Room rate at the Grandiose Hotel and Casino, which is near the Peacock	$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.

050100150200250300350400450500500450400350300250200150100500PRICE (Dollars per room)QUANTITY (Hotel rooms)Demand  

Graph Input Tool

Market for Peacock's Hotel Rooms
	Price (Dollars per room)
	Quantity Demanded (Hotel rooms per night)

Demand Factors
	Average Income (Thousands of dollars)
	Airfare from LAX to LAS (Dollars per roundtrip)
	Room Rate at Grandiose (Dollars per night)

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Peacock is charging $350 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 Peacockrises from

150

rooms per night to

250

rooms per night. Therefore, the income elasticity of demand ispositive , meaning that hotel rooms at the Peacock area normal good .

Answer 1

In the given question, the demand law is applicable where quantity on horizontal axis is peacock hotel rooms and price on vertical axis is room rent per night at peacock hotel.

See the graph( it is missing in question) above----

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Initially the hoel fixes the price of hotel rooms at 350$ and the hotel rooms are 150 at this price.

Now the american' s average household income rises 10%, there will be changes in the Quantity demanded of hotel rooms.

* As the hotel rooms is a normal good ( not inferior good), the income Effect will be positive ,, which means there is direct relationship between income and demand for a good, so with the rise in income of consumer, they demand for more normal goods as their capacity to buy increases with increase in income .

* There is increase in income by 10% , so Quantity of rooms will also increases by 10% ,that is from 150 rooms to 165 rooms ( 150+10%of 150).

#If average household income Increases by 10% from $50000 to $55000 per year , the quantity of rooms demanded at the peacock rises from 150 rooms per night to 165 rooms per night.

Therefore the income elasticity of demand is positive , meaning that hotel rooms at the peacock are a Normal good.