9. Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Peacock 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 $40,000 per year Roundtrip airfare from New York (JFK) to Las Vegas (LAS) $200 per roundtrip Room rate at the Grandiose Hotel and Casino, which is near the Peacock $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 eld will change accordingly. Graph Input Tool Market for Peacock's Hotel Rooms 500 I Price 450 (Dollars per room) 350 40 Quantity E Demanded 150 350 'I' (Hotel rooms per 9 ' night) a 300 | a I 250 Demand Factors I g 200 I E | Average Income 0 150 _ (Thousands of dollars) E I emand . 100 -_ : algae from JFK to 200 50 __ I ( Dollars per roundtrip) o : : I : : : I : : $333.33 at 250 u so 100 150 200 250 300 350 400 450 500 (Dollars per night) QUANTITY (Hotel rooms) For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Peacock is charging $350 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 Peacock V from [:] rooms per night to [:] rooms per night. Therefore, the income elasticity of demand is V , meaning that hotel rooms at the Peacock are V . If the price of a room at the Grandiose 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 Peacock V from C] rooms per night to C] rooms per night. Because the cross-price elasticity of demand is V , hotel rooms at the Peacock and hotel rooms at the Grandiose are V . Peacock 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 V . Decreasing the price will always have this effect on revenue when Peacock is operating on the V portion of its demand cun/e
