9. 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 \\i'alue Average American household income $40,000 per year Roundtrip airfare from Pittsburgh {PIT} to Atlantic City (MN) $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 wil! not he graded on any changes you make to this graph. Note: Once you enter a value in a white eld, the graph and any corresponding amounts in each grey eld will change accordingly. Graph Input Tool 500 Market for Lakes's Hotel Rooms 450 |:| Price 400 (Dollars per morn) "' Quanti E 350 - Deman ed 300 E (Hotel rooms per '3 300 - night) E 250 i Q m + Demand Factors \"J I Q 150 u: I Derrand Average Income \"- we | (Thousands of I dollars) 50 I Airfare from PIT to ACY " I (Dollars per a so 100 150 200 250 300 350 400 450 500 mund'trip,' QUANTITYiHoteI rooms) 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 $200 per room per night. If average household income increases by 25%, from $40,000 to $50,000 per year, the quantity of rooms demanded at the Lakes falls V from rooms per night to rooms per night. Therefore, the income elasticity of demand is negative V , meaning that hotel rooms at the Lakes are an inferior good V . If the price of an airline ticket from PIT to ACY were to increase by 20%r from $250 to $300 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Lakes rises V from \\:| rooms per night to \\:| rooms per night. Because the cross- price elasticity of demand is positive V , hotel rooms at the Lakes and airline trips between PIT and ACY are substitutes V . Lakes 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 increase V . Decreasing the price will always have this effect on revenue when Lakes is operating on the elastic V portion of its demand curve