8. 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.

Demand FactorInitial ValueAverage American household income$50,000 per yearRoundtrip airfare from Los Angeles (LAX) to Las Vegas (LAS)$250 per roundtripRoom rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens$200 per nightUse 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.

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PRICE (Dollars per room)

QUANTITY (Hotel rooms)

Demand

Graph Input Tool

Market for Triple Sevens'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 Exhilaration

(Dollars per night)

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Triple Sevens is charging $150 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 fromrooms per night torooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Triple Sevens are .

If the price of a room at the Exhilaration were to decrease by 20%, from $200 to $160, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens fromrooms per night torooms per night. Because the cross-price elasticity of demand is , hotel rooms at the Triple Sevens and hotel rooms at the Exhilaration are .

Triple Sevens is debating decreasing the price of its rooms to $125 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 Triple Sevens is operating on the portion of its demand curve.