4 . Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand: . Availability of close substitutes . Whether the good is a necessity or a luxury . Whether the good is broadly defined . The proportion of a consumer's budget spent on the good . Time people have to adapt to new price changes A good with many close substitutes is likely to have relatively demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises. elastic A good's price elasticity of demand depends in part on how ne inelastic s relative to other goods. If the following goods are priced approximately the same, which one has the most elastic demand? O A heart valve for heart attack victims Diamond necklacePrice elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand? O Fish food O Monthly cell phone bill O Thumbtacks The price elasticity of demand for a good also depends on how you define the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between. Categories Most Elastic In Between Least Elastic Merlot O O O Beverages O O O Wine O O O The price elasticity of demand is also affected by the given time horizon. If the price of gasoline is relatively high for a long time, consumers are more likely to buy fuel-efficient cars or switch to alternatives, such as public transportation. Therefore, the demand for gasoline is elastic in the short run than in the long run.6 . Elasticity and total revenue I The following graph shows the daily demand curve for bippitybops in Calgary. On the following graph, use the green rectangle (triangle symbols) to shade the area representing total revenue at various prices along the demand curve. Notice that when you click on the rectangle, the area is displayed. Note: You will not be scored on any changes made to this graph. (?) 300 275 250 Total Revenue 225 200 175 PRICE (Dollars per bippitybop) 150 125 100 75 B 50 25 Demand 0 3 6 9 12 15 27 30 36 QUANTITY (Bippitybops per day)On the following graph, use the green point (triangle symbol) to plot the daily total revenue when the market price is $50, $75, $100, $125, $150, $175, and $200 per bippitybop. 3180 A 2940 Total Revenue 700 2460 220 TOTAL REVENUE (Dollars) 1980 1740 1500 1260 1020 0 25 50 75 100 125 150 175 200 225 250 275 300 PRICE (Dollars per bippitybop) According to the midpoint method, the price elasticity of demand between points A and B on the initial graph is approximately_ Suppose the price of bippitybops is currently $75 per bippitybop, shown as point A on the initial graph. Because the price elasticity of demand between points A and B is , a $25-per-bippitybop decrease in price will lead to in total revenue per day. In general, in order for a price increase to cause an increase in total revenue, demand must be elastic11 . Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Triple Sevens 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. (Note: All values are hypothetical.) Demand Factor Initial Value Average Canadian household income $50,000 per year Round trip airfare from Ottawa (YOW) to Las Vegas (LAS) $100 per round trip Room rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens $200 per night Use the graph input tool to help you answer the following questions. You will not be scored 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 Triple Sevens's Hotel Rooms Price 350 (Dollars per room) Quantity 150 Demanded (Hotel rooms per night PRICE (Dollars per room) Demand Factors Demand Average Income 50 (Thousands of dollars) 50 Airfare from YOW to 100 LAS O (Dollars per round 50 100 150 200 250 300 350 400 450 500 trip) QUANTITY (Hotel rooms) Room Rate at 200 Exhilaration (Dollars per night) For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Triple Sevens 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 Triple Sevens _ from rooms per night to rooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Triple Sevens are If the price of an airline ticket from YOW to LAS were to increase by 50%, from $100 to $150 round trip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens _ from rooms per night to rooms per night. Because the cross-price elasticity of demand is V, hotel rooms at the Triple Sevens and airline trips between YOW and LAS are Triple Sevens 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 7 . Decreasing the price will always have this effect on revenue when Triple Sevens is operating on the portion of its demand curve