ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Transcribed Image Text:The following graph input tool shows the daily demand for hotel rooms at the Oceans 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
Average American household income
Roundtrip airfare from Des Moines (DSM) to Atlantic City (ACY)
Room rate at the Meadows Hotel and Casino, which is near the Oceans
PRICE (Dolars per room)
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.
500
450
400
360
300
250
200
150
100
50
0
Demand
50 100 150 200 250 300 350 400 450 500
QUANTITY (Hotel rooms)
Graph Input Tool
Market for Oceans's Hotel Rooms
Price
(Dollars per room)
Quantity
Demanded
(Hotel rooms per
night)
Initial Value
$40,000 per year
$200 per roundtrip
$250 per night
Demand Factors
Average Income
(Thousands of
dollars)
Airfare from DSM to
ACY
(Dollars per
roundtrip)
Room Rate at
Meadows
(Dollars per night)
350
150
40
200
250
For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Oceans is charging $350 per room
per night.
from
If average household income increases by 50%, from $40,000 to $60,000 per year, the quantity of rooms demanded at the Oceans
rooms per night to
rooms per night. Therefore, the income elasticity of demand is
, meaning that hotel rooms at the
Oceans are
If the price of a room at the Meadows 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 Oceans
from
rooms per night. Because the cross-price elasticity of
demand is
rooms per night to
hotel rooms at the Oceans and hotel rooms at the Meadows are
Oceans 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
Decreasing the price will always have this effect on revenue when Oceans is operating on the
portion of its
demand curve.
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