9. Application: Elasticity and hotel rooms The following graph input tool shows the daily demand for hotel rooms at the Rivers 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 New Orleans (MSY) to Atlantic City (ACY) Room rate at the Continental Hotel and Casino, which is near the Rivers Initial Value $40,000 per year Bookmark this tab undtrip $250 per night 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. PRICE (Dollars per room) 500 450 400 350 300 250 Graph Input Tool Market for Rivers's Hotel Rooms Price (Dollars per room) 100 Quantity Demanded 400 (Hotel rooms per night) 200 150 Demand Factors Demand Average Income 40 (Thousands of 100 dollars) 50 Airfare from MSY to 250 ACY 0 (Dollars per 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Hotel rooms) roundtrip) Room Rate at Continental (Dollars per night) 250 ? For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Rivers is charging $100 per room per night. If average household income increases by 25%, from $40,000 to $50,000 per year, the quantity of rooms demanded at the Rivers, rooms per night to rooms per night. Therefore, the income elasticity of demand is from , meaning that hotel rooms at the Rivers are If the price of a room at the Continental were to decrease by 20%, from $250 to $200, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Rivers rooms per night to demand is from rooms per night. Because the cross-price elasticity of , hotel rooms at the Rivers and hotel rooms at the Continental are Rivers is debating decreasing the price of its rooms to $75 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 Rivers is operating on the portion of its demand curve.