GB: Great Bargains
Subject Elasticity of demand
Topic Elasticity
Key Words Bargains, rates
News Story

There are great bargains to be had if you want to visit Great Britain this summer. The reason is that foot and mouth disease has deterred many from touring the country. Visits by Americans are down an estimated 10-20 percent. In reality, fears are unwarranted. The disease is harmless to humans, and is in decline anyway. Tourist sites, which were closed earlier in the year to stop humans spreading the disease from place to place on their shoes, are now open again.

The deals include reduced rates at upscale country houses, such as Knockinaam Lodge in Scotland, which is cutting its rates by 20 percent and giving a free split of champagne to guests. Golf courses are offering cheaper week-long golf packages. British Airways had offered three free nights in a London hotel for those buying an air ticket. Alamo has reduced its rental rates by 10 percent. Tourists on the Royal Scotsman luxury train get a free night at the Sheraton Grand Hotel in Edinburgh before the tour.

Not everybody is lowering prices. Some say that making tourism cheaper will not dissuade scared tourists. One owner of a country house states that he believes that tourists have already made plans, and that lowering prices will not have any effect on occupancy.

(Updated July 1, 2001)

1. Alamo has reduced the price of renting a car in Britain by 10 percent.
a) If the intent is to increase revenue, by how much would the quantity demanded have to rise?
b) If it did rise by this amount, what would be the price elasticity of demand in numerical terms? Would demand be price-inelastic, elastic, or of unitary elasticity?
2. British Airways offered free hotel stays when an air ticket was purchased.
a) If the quantity of transatlantic air flights demanded increased as a result, in what numerical range must the cross-price elasticity of demand for air travel and hotels be?
b) What kind of economic goods must air travel and hotel stays be? Explain your answer.
3. Some hotels have not reduced their rates.
a) If their objective is to increase revenue, in what numerical range must the price elasticity of demand be? Explain your answer.
b) Would demand be price-elastic, inelastic, or unitary elastic?
c) What are the determinants of the price elasticity of demand? Explain the degree of elasticity you have identified in a) and b) in terms of one or more of these determinants.
Source Gene Sloan, "Great Britain, open for business, offers great bargains," USA Today, May 18, 2001.

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