For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Peacock is c

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For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Peacock is c

harging $200 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 Peacockrises from 300 rooms per night to 400 rooms per night. Therefore, the income elasticity of demand ispositive , meaning that hotel rooms at the Peacock area normal good . If the price of a room at the Grandiose were to decrease by 10%, from $250 to $225, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Peacockfalls from 300 rooms per night to 250 rooms per night. Because the cross-price elasticity of demand isnegative , hotel rooms at the Peacock and hotel rooms at the Grandiose are substitutes . Peacock is debating decreasing the price of its rooms to $175 per night. Under the initial demand conditions, you can see that this would cause its total revenue to decrease . Decreasing the price will always have this effect on revenue when Peacock is operating on theelastic portion of its demand curve.

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1 answer:

Mariulka [3.1K] · Answer 1 · 2026-02-27T20:58:02+03:00

Answer: The Demand should be inelastic

Explanation:

The accommodation at Peacock hotel is recognized as a standard good, exhibiting a negative price elasticity of demand, indicating that a reduction in room rates will increase demand for the accommodations at Peacock.

If Peacock opts to set prices at $175 per room, for total revenue to decline, the demand must remain inelastic. An inelastic demand means that lowering the price to $175 would only slightly impact the number of rooms rented out at Peacock, resulting in reduced total revenue.