ssume you are an employee of Best Eastern Motels You have de

ssume you are an employee of Best Eastern Motels. You have determined that the cross elasticity of demand between your firm\'s rooms and gasoline is -5/7. When the price of gasoline was S.75 per gallon, an average of 22 thousand of your firms rooms were rented per night. You expect the price of gasoline will increase to $1.00 per gallo If the prices of your firm\'s rooms and other motel rooms do not change, how many ro will your firm rent per night? 3. A

Solution

3. Cross-price elasticity of demand between rooms and gasoline = -5/7 (approximately -0.71)

When gasoline price was $0.75, number of rooms rented = 22,000.

Now, the price of gasoline increased to $1.00

Percentage change in the price of gasoline = ($1.00-0.75)/0.75 = 1/3 (approximately 0.33)

Cross-price of demand = % change in quantity demanded of rooms/ % change in price of gasoline.

-0.71 = % change in quantity demanded of rooms/0.33

Percentage change in quantity demanded of rooms = -0.71 x 0.33

Percentage change in quantity demanded of rooms = -0.2343 or 23.43% (decrease in demand)

Number of rooms rented per night = 22,000 x (1-0.2343) = 22,000 x 0.7657

Number of rooms rented per night = 16,845 rooms (approximately).

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