Question

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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	$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 $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 (rises or falls)

from ___ rooms per night to ___ rooms per night. Therefore, the income elasticity of demand is (negative or positive), meaning that hotel rooms at the Big Winner are (a normal good or inferior good).

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 (falls or rises) from ___ rooms per night to ___ rooms per night. Because the cross-price elasticity of demand is (negative or positive), hotel rooms at the Big Winner and airline trips between LAX and LAS are (substitutes or complements).

Big Winner is debating decreasing the price of its rooms to $325 per night. Under the initial demand conditions, you can see that this would cause its total revenue to (decrease or increase). Decreasing the price will always have this effect on revenue when Big Winner is operating on the (elastic or inelastic) portion of its demand curve.

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tudent lake Quiz&q Averag 9. Application: Flasticity and hotel rooms ph ily d he Big Wi Hot Nevada g g management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. factors, along with he ues corresponding the ini tial demand curve, are shown the fol al nd a longside he gra ph ng table put Far to Average American household income $50,000 per year Roundtrip are 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 gh S200 pel Use the araph input tool to help you answer the foliowing questions. You not be graded on any changes you make to this araph a white eld he graph and a nd ach grey d wi hange accordingly. Note: Once ente nts in e ny correspo ng a Graph Input Tool Market for Big Winner's Hotel Rooms 450 U Pri 350 Dollars per room) 400 350 Hotel rooms per night) 300 250 Demand Factors 9 200 AV errand ds of dofiarsU Airtare fro AX to 250 Dollars per roundtrip 50 100 150 200 250 300 350 400 450 500 Lucky Room Rate a 200 QUANTITY (Hotel rooms. Dollars per night) Hor each of the following scenanos, begin by assuming that all demand factors are set to their original values and Big Vinner s charging If average household income in by 20%, from S3 to $60,000 per year, the quanti ty of rooms demanded at the D g Winner 00 rooms per night. Therefore, e elasticity of demar nd is 150 rooms pet nig hol tel room is at he Big Winne the price of a ne ticket from LAX to LAS were to int e by 20%, fr om $250 to $300 roundtnp while a othe demand factors re initial values, the cuantity of rooms demanded at the Big Win falls from 150 rooms per night to 50 rooms per night. I the Big W AX d IAS Big Winner is debating decreasing the pnce of its rooms to $325 per night. Under the initial demand conditions, you can see that this wo revenue to increase Decreasing L price will always have this elfect on revenue when Big Winner is operating on the Lata Grade E Now Save & Session Pyrig

Answer 1

1. rises, from 150 to 200

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

% change in quantity demanded = (200 - 150)/150 X 100 = 5000/150 = 33.3%

% change in income = 20%

Income Ed = 33.3/20 = 1.67

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

4. falls, 150 to 50

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

% change in quantity demanded = (50 - 150)/150 X 100 = - 33.3%

% change in price of airplane ticket = 20%

Cross price elasticity = - 33.3/20 = - 1.67

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

7. increases; elastic