The following graph input tool shows the daily demand for hotel rooms at the Big Winner Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. Demand Factor Initial Value
Average American Household Income $40,000 per year
Roundtrip Airfare from New York to Las Vegas $200 per roundtrip
Room rate at the Lucky Hotel and Casino, which is near the Big Winnter$200 per night
For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Big Winner is charging $200 per room per night.
1) If average household income increases by 50%, from $40,000 to $60,000 per year, will the number of rooms demanded at the Big Winner rise or fall? From how many rooms per night (current number to predicted number)?
2) Based on the first question, will the income elasticity of demand be negative or positive? Does this mean the hotel rooms at the Big Winner are a normal or inferior good?
3) If the price of a room at the Lucky were to decrease by 20%, from $200 to $160, while all other demand factors remain at their initial values, will the demand of rooms at the Big Winner rise or fall? From how many rooms per night (current number to predicted number)?
4) Based on the third question, will the cross-price elasticity of demand be negative or positive? Will the hotel rooms at the Big Winner and hotel rooms at the Lucky be complements or substitutes?
5) Big Winner is debating decreasing the price of its rooms to $175 per night. Under the initial demand conditions, would this cause its total revenue to decrease or increase? If decreasing the price will always have this effect on revenue, will the Big Winner operate on the elastic or inelastic portion of its demand curve?