Homework (Ch 05) - 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 Value Average American household income $40,000 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 $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. Graph Input Tool ? 500 Market for Lakes's Hotel Rooms 450 Price 300 (Dollars per room) 400 Quantity 200 350 Demanded (Hotel rooms per 300 night) 250 PRICE (Dollars per room ) 200 Demand Factors 150 Demand Average Income 40 (Thousands of 100 dollars) 50 Airfare from DSM to 200 ACY (Dollars per 50 100 150 200 250 300 350 400 450 500 roundtrip) QUANTITY (Hotel rooms) Room Rate at 200 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 $300 per room per night. If average household income increases by 50%, from 540,000 to $50,000 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 '7 , meaning that hotel rooms at the Lakes are T _ If the price of a room at the Mountaineer were to decrease by 20%, from $200 to $160, while all other demand factors remain at their initial 1.ralues, the ouantitg.r of rooms demanded at the Lakes V from |:| rooms per night to: rooms per night. Because the crossprice elasticity of demand is V , hotel rooms at the Lakes and hotel rooms at the Mountaineer are T . Lakes is debating decreasing the price of its rooms to $2?5 per night. Under the initial demand conditions, you can see that this would cause its total revenue to T . Decreasing the price will always have this effect on revenue when Lakes is operating on the '1' portion of its demand curve