Question

"If average household income increases by 10%, from $50,000 to $55,000 per year, the quantity of rooms demanded at the Triple Sevens from rooms per night to rooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Triple Sevens are . If the price of an airline ticket from LAX to LAS were to increase by 20%, from $250 to $300 round trip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens from rooms per night to rooms per night. Because the cross elasticity of demand is , hotel rooms at the Triple Sevens and airline trips between LAX and LAS are . Triple Sevens is debating decreasing the price of its rooms to $275 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 Triple Sevens is operating on the portion of its demand curve."

Answer 1

Answer:

Explanation:

If income increases by 10% that is from $ 50000 to $55000, the demand curve shifts vertically upward by 10% . the horizontal and vertical intercepts for the new demand were are 550 and 550 . the quantity demanded of rooms at triple seven rises from 200 to 250 rooms per night.

Income elasticity of demand = % change in quantity demanded/% change in income= [(250-200)/200]*100/1 0=2.5

The income elasticity of demand is positive which means that the hotel rooms at triple seven is normal good.

If airline fare increases by 20% that is from $ 250 to $300, the demand curve shifts vertically downward by 20% . the horizontal and vertical intercepts for the new demand were are 400 and 400 . the quantity demanded of rooms at triple seven rises from 200 to 1O0 rooms per night.

Cross price elasticity of demand = % change in quantity demanded of hotel rooms/% change in airfare = [200-100)/200]*100/1 0=5

The cross price elasticity of demand is positive which means that the hotel rooms at triple seven and airfare to roundtrip are complements.

If price is decreased from $300 to $275, Total revenue will increase.

Total revenue before price decrease= 300 *150=45000

Total revenue after price increase= 275*175 =48125

Thus total revenue increases. This will always be the case if triple sevens is operating at the elastic portion i.e upper half of demand curve.