Question

Grand Palace Hotel demand function for its guest room for the month of May 2021 is represented by the following equation.

Qd=700–2Pr +0.21TS+1.6I+0.05E Where,

Grand Palace Hotel and traveller’s expectation that a lower room price over the next six months:

TS = 20

I = 2.5

E = 100

1. Derive the demand equation for Grand Palace Hotel for the month of May 2021, based on the assumption of ‘ceteris paribus’.
2. Calculate the price for a room when the demand is 150
3. Defend whether the assumption that the principle of ‘ceteris paribus’

is a reasonable assumption.

Answer 1

$Qd=700-2Pr+0.21TS+1.6I+0.05$

$Qd= 700-2Pr+4.2+4+5$

$Qd=713.2-2Pr$

$150=713.2-2Pr$

Like terms:

$2Pr=713.2-150$

$2Pr=563.2$

Price=281.6

3.) The principle ceteris peribus is only valid when other factors are held constant. Otherwise, it is operate in reality.