20. Application: Elasticity and hotel rooms

The following graph input tool shows the daily demand for hotel rooms at the Lakes Hotel and Casino in Atlantic City, New Jersey. 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	$40,000 per year
Roundtrip airfare from Des Moines (DSM) to Atlantic City (ACY)	$250 per roundtrip
Room rate at the Mountaineer Hotel and Casino, which is near the Lakes	$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.

050100150200250300350400450500500450400350300250200150100500PRICE (Dollars per room)QUANTITY (Hotel rooms)D1D2300, 100

Graph Input Tool

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

Demand Factors
	Average Income (Thousands of dollars)
	Airfare from DSM to ACY (Dollars per roundtrip)
	Room Rate at Mountaineer (Dollars per night)

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Lakes is charging $100 per room per night.

If average household income increases by 50%, from $40,000 to $60,000 per year, the quantity of rooms demanded at the Lakesrises from

rooms per night to

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

If the price of an airline ticket from DSM to ACY 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 Lakesfalls from

rooms per night to

rooms per night. Because the cross-price elasticity of demand isnegative , hotel rooms at the Lakes and airline trips between DSM and ACY aresubstitutes .

Lakes is debating decreasing the price of its rooms to $75 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 Lakes is operating on the portion of its demand curve.