Answer to Question #58177 in Macroeconomics for Nutan

Question

The Cowtown Hotel is the only first-class hotel in Fort Worth. The hotel owners hired economics advisors for advice about improving the hotel’s profitability. They suggested it could increase this year’s revenue by raising prices. The owners asked, “Won’t raising prices reduce the quantity of hotel rooms demanded and increase vacancies?” What do you think the advisors replied? Why would they suggest increasing prices?

Answer 1

If the owners suggest the increase of this year’s revenue by raising prices, the advisors will reply, that the demand for hotel rooms will decrease in this case and the quantity of vacancies will increase according to the increase in price. But as the Cowtown Hotel is the only first-class hotel in Fort Worth, then the demand for its rooms is inelastic, so the increase in price will cause the increase in total revenue, because the decrease in quantity demanded will not be so signifficant. So, they will suggest increasing prices.