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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
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 Average American household income Roundtrip airfare from New York (JFK) to Las Vegas (LAS) Room rate at the Lucky Hotel and Casino, which is near the Big Winner Initial Value $50,000 per year $100 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 500 Market for Big Winner's Hotel Rooms 450 200 400 Price (Dollars per room) Quantity Demanded (Hotel rooms per night 300 350 300 E Dollars per room) 250 Demand Factors 200
* Uyuu yn yr yny Graph Input Tool SOD Market for Big Winner's Hotel Rooms 450 400 200 350 + Price (Dollars per room) Quantity Demanded (Hotel rooms per night) 300 300 PRICE (Dollars per room) 250 200 Demand Factors 150 Demand 100 50 50 0 Average Income (Thousands of dollars) Airfare from JFK to LAS (Dollars per roundtria) Room Rate at Lucky (Oollars per night 100 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Hotel rooms) 250 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 hotel rooms at the Big Winner are . meaning that
PRICE 150 100 Demand 50 50 0 Average Income (Thousands of dollars) Airfare from JFK to LAS (Dollars per roundtrip) Room Rate at Lucky (Dollars per night) 100 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Hotel rooms) 250 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 a room at the Lucky were to decrease by 10%, from $250 to $225, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner rooms per night to rooms per night. Because the cross-price elasticity of demand is ., hotel rooms at the Big Winner and hotel rooms at the Lucky are from 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 Decreasing the price will always have this effect on revenue when Big Winner is operating on the portion of its demand curve. total revenue to Grade It Now Save & Continue Continue without saving LL d
Expert Solution
Notice clearly that only $5000(increase in income is spent on buying rooms at Big Winner) and not 55,000.
Increase in Income = 5000
(assume it is only spent on buying Room at Big Winners)
The demand for Big Winners hotel room is subject to ceteri paribus (all other demand factors remaining same)
Price of 1 room at Big Winners= 200
Total extra room bought =Increase in income/price of 1 room
= (5000/200)
= 25
note that since demand of good increase with increase in income income elasticity should be positive(basic principle of income elasticity)
Quantity demaded increses from 300 to 300+25=325
income elasticity of demand is ( positive )
If average household income increases by 10%, from $50,000 to $55,000 per year, the quantity of rooms demanded at the Big Winner ( rises) from 300 rooms per night to 325 rooms per night. Therefore, the income elasticity of demand is (positive), meaning that hotel rooms at the Big Winner are (a normal good)
solution 2nd para
An important information seems to be missing here which is initial rooms occupied at Lucky with initial rooms demanded at Big Winner being 300.
therefore lets keep ceteri paribus condition and ignore quantity of room demanded at Big winner to find solution.
when income = 50,000
Price of room at Lucky =25
Quantity of room demanded at Lucky= 50000 / 250
= 200
When price of room at Lucky =225
Quantity demanded= 50000 / 225
= 222.22 = 222(approx.)
Notice that rooms at room at big winner and Lucky are substitutes,therefore cross elasticity will be positive
If the price of a room at the Lucky were to decrease by 10%, from $250 to $225, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Lucky ( rises) from 200 rooms per night to 222 rooms per night. Because the cross-price elasticity of demand is (positive), hotel rooms at the Lucky and hotel rooms at the Big Winner are (substitutes)
solution 3rd para
Notice that by midpoint rule the portion above midpoint of demand curve is elastic while below it is inelastic.
For further confirmation
Quantity at Big Winner when price of room is 175(midpoint of 150 and 200 on graph) = (midpoint of 300 and 350 on graph i.e 325)
Initial Revenue= P1* Q1=200*300=60,000
Final Revenue= P2 * Q2 =175*325=39,375
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 (decrease). Decreasing the price will always have this effect on revenue when Big Winner is operating on the (inelastic) portion of its demand curve.
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