Q2 Kinz Hotel had compiled a past year (2019) data on the numbers of rooms demanded

by its clients as a result of room rates changes. During the off-peak season in May, a
promotion was held and it discounted the room rate from $550 to $480. This
promotion of room rate had brought in 650 room stays compared to 320 rooms stays
before the room rate adjustment.
(a) Calculate the price elasticity of demand of Kinz Hotel’s clients. (3 marks)
Answer:
Solution
Price (Y) Quantity demanded (Q)
550 420
480 260

P1 = 550 P2 = 480
Q1 = 320 Q2 = 650
Now,
∆Q = Q2 – Q1 = 650- 320 = 330
∆P = P2 – P1 = 480- 550 = -70
We know that
ΔQ P 330 550
Ep = × = × = -8.10
ΔP Q −70 320

(b) Interpret the elasticity of demand of the clients based on the answer in (a). ( 2
marks)
Answer: The negative sign indicates that price and quantity demanded are
inversely related. Which means if the price increases quantity demand decreases
and vice versa. After removing the negative sign the absolute value of Ep= 8.10 . It
shows that quantity demand increases by 8.10 due to 1 percent decrease in price.
(c) During this promotion period, the room stay demanded of Sunny Hotel had
dropped from 420 to 260. Calculate the cross elasticity of demand of Kinz Hotel
and Sunny Hotel. (3
marks)
 Answer:
Solution,
Price of Kinz hotel Quantity demanded of
(Py) sunny hotel (Qx)
550 420
480 260

Py1 = 550 Py2 = 480

Qx1 = 420 Qx2 = 260
Now,
∆Q = Q2 – Q1 = 420- 260 = 160
∆P = P2 – P1 = 480- 550 = -70
We know that
ΔQx Py 160 550
Exy = ×
ΔPy Qx
= −70 ×
420
= -2.99

(d) Based on the answer in (c), identify the relationship between Kinz Hotel and
Sunny Hotel? (2
marks)
Answer: The relationship between Kinz Hotel and Sunny hotel is of cross elasticity of
demand. They are substitute goods. They have a direct relationship, which means
if the price of Radisson Hotel decreases the quantity demand of Soaltee hotel
also decreases and vice versa.
(e) The Chief Executive Officer of Kinz Hotel had proven that the increase of rooms
stay demanded in May was also contributed by the increase of average household
income. According to the national statistic, during that particular month, the
average household income had increased from $2650 to $3000. Calculate the
income elasticity of demand. (3
marks)
Answer:
Solution
 Income (Y) Quantity Demanded (Q)
2650 320
Y1 = 2650 Y2 =
3000 650
3000
Q1 = 320 Q2 = 650
Now,
∆Q = Q2 – Q1 = 650- 320 = 330
∆Y = Y2 – Y1 = 3000- 2650 = -70
We know that
ΔQ Y 330 2650
EY = × = × = 7.80
ΔY Q 350 320

(f) Based on the answer in (e), examine type of goods and services had been offered
by Kinz Hotel. (2
marks)
Answer: The goods and service by the Kinz hotel is a normal good. It provides both
tangible and intangible goods and service.