A hotel increased its room rates from $100 to $110 and found that rooms sold per night decreased by 8%. The hotel's price elasticity index is:

Question

Quizplus · Accepted Answer

Price elasticity of demand = % Change in quantity demanded / % Change in price

Here, the price has increased from $100 to $110 which is an 10% increase ([(110-100)/100] x 100 = 10%)
The quantity demanded decreased by 8% due to the price increase.

So, price elasticity of demand = -8%/10% = -0.8

Since the elasticity is negative, we consider the absolute value, which is 0.8. Therefore, the hotel's price elasticity index is 0.8, which is option B.

A Hotel Increased Its Room Rates from $100 to $110