Question

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Triple Sevens is charging $150 per room per night. If average household income increases by 10%, from $50,000 to $55,000 per year, the quantity of rooms demanded at the Triple Sevens Rises from 150 rooms per night to 200 rooms per night. Therefore, the income elasticity of demand ispositive , meaning that hotel rooms at the Triple Sevens area normal good . If the price of a room at the Exhilaration were to decrease by 20%, from $200 to $160, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Seven Falls from 150 rooms per night to 50 rooms per night. Because the cross-price elasticity of demand isnegative , hotel rooms at the Triple Sevens and hotel rooms at the Exhilaration are substitutes . Triple Sevens is debating decreasing the price of its rooms to $125 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: Please refer to the explanation section

Step-by-step explanation:

When income raises demand raises this tells us the Triple Sevens hotel rooms are a normal good.

Hotels rooms at the Exhilaration are a direct substitute for Triple sevens' Hotel Rooms'. When the price of hotel room per night at The exhilaration decrease by 20%, the demand for Triple Sevens hotel room falls from 150 to 50 rooms. this tells us that the price elasticity of demand is negative, if Triple sevens raises it price the quantity of rooms per night demanded will fall.

The Demand for Triple Sevens hotel rooms is elastic, the demand for hotel rooms is sensitive to price changes. When the price of triple sevens' hotel rooms decrease, the quantity of hotel rooms demanded will increase which will then increase revenue of Triple Seven. Decreasing the Price will always increase the revenue as long as the Demand is elastic with a negative price elasticity of demand.

Initial demand conditions

• Demand must be elastic
• Price Elasticity must be Negative
• The Good being sold is a normal good (Positive income elasticity)