Question

When you decide to go and have a dinner with your friends in a world class hotel such as the Golden Tulip or La Pleasure Beach, perhaps you would be horrified by the high price you would have to pay for a bottle of soft drink such as Coca Cola or Pepsi Cola or wine or even bottled water. Perhaps you begin to ponder why the same commodity that you can get at a supermarket at one tenth the hotel price is going for such an astronomical price at the hotel. Of course, such facilities will have a warning such “you are not allowed to bring in your own food or drinks” posted at appropriate places in the facility for the attention of customers.In another scenario, you enter a designer shop to buy clothes with a designer label for a friend on their birthday or on Valentine day and you reckon the clothes are so much expensive compared to similar own brand clothes from a clothing or chain store, even though they may cost a similar amount to produce. Using your knowledge in basic economics, especially of the concept of demand and supply, attributes of a competitive market and price elasticity of demand, briefly discuss the following: A. Why may a hotel charge such very high prices for wine, soft drinks or even bottled water and yet quite reasonable prices for food and still get away with such high prices? B. Why are designer shops able to price their clothes so very expensive and yet still get clients even though similar clothes that are available in a supermarket chain shops cost pretty much less? Your answer should not occupy more than one and half pages of A4 paper.

Answer 1

Answer: The answer is given below

Step-by-step explanation:

A. A hotel charge such very high prices for wine, soft drinks or even bottled water and yet quite reasonable prices for food and still get away with such high prices because the tax rate charged to the hotels may be high. Another reason is due to the reputation of the hotel and also due to the fact the hotel has many services which are rendered to its client and therefore they have to take the cost into consideration when services are provided which can come in form of high prices drinks.

The main reason why food may be cheaper than drinks is that drinks are branded unlike the hotel food which is prepared at the hotel. Also, drinks have tax, which therefore the hotel takes into consideration and increase the price and moreover, the hotels cater for an audience that has inelastic demand, therefore when price increases, the customers are willing to pay a higher price since there's minimal change.

B. The main reason why designer clothes are expensive and still get customers and get clients is because of their reputation and they have a goodwill which has been attached to their brand, therefore consumers will be willing to pay a higher price. Also, the good is a veblen goods which implies that rise in price leads to rise in demand and the good I valued more by the consumers when the price increase.