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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 $50,000 per year Roundtrip airfare from Des Moines (DSM) to Atlantic City (ACY) $200 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. Graph Input Tool Market for Lakes's Hotel Rooms 500 - 450 D Price 350 400 (Dollars per room) " Quantity E 350 + Demanded 150 9 I (Hate! rooms per 5 300 I night) CL m I E 250 I B Q 200 | Demand Factors 5 I _ 150 o: I Denand Average Income 50 '1 I (Thousands of - 100 I doiiars) 50 I Airfare from DSM to ACY 200 I] i (Doiiars' per 0 50 100 150 200 250 300 350 400 450 500 roundtrrp) QUANTITY (Hotel rooms) Room Rate at 250 Mountaineer (Doiiars 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 $350 per room per night. If average household income increases by 20%, from $50,000 to $60,000 per year, the quantity of rooms demanded at the Lakes 7 from |:] rooms per night to |:| rooms per night. Therefore, the income elasticity of demand is V , meaning that hotel rooms at the Lakes are T If the price of an airline ticket from DSM to ACY were to increase by 10%, from $200 to $220 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Lakes 7 from C] rooms per night to |:| rooms per night. Because the cross-price elasticity of demand is V , hotel rooms at the Lakes and airline trips between DSM and ACY are V . Lakes 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 Lakes is operating on the 7 portion of its demand curve