If average household income increases by 50%, from $40,000 to $60,000 per year, the quantity of rooms demanded at the Peacock fromrooms per night torooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Peacock are . If the price of a room at the Grandiose 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 Peacock fromrooms per night torooms per night. Because the cross-price elasticity of demand is , hotel rooms at the Peacock and hotel rooms at the Grandiose are . 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 . Decreasing the price will always have this effect on revenue when Peacock is operating on the portion of its demand curve.

Explanation:

If average household income increases by 50%, from $40,000 to $60,000 per year, the quantity of rooms demanded at the Peacock RISES from 300 rooms per night to 350 rooms per night. Therefore, the income elasticity of demand is POSITIVE, meaning that hotel rooms at the Peacock are a NORMAL GOOD.

If the price of a room at the Grandiose 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 Peacock FALLS from 300 rooms per night to 250 rooms per night. Because the cross-price elasticity of demand is POSITIVE , 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 the INELASTIC portion of its demand curve.

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