Question

If the price of an airline ticket from PIT to ACY were to increase by 20%, from $250 to $300 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Lakes from 100 rooms per night to 80 rooms per night. because the cross-price elasticity of demand is , hotel rooms at the Lakes and airline trips between PIT and ACY are .

option a: Complementary goods
option b: Substitutes
option c: Independent goods
option d: Perfect substitutes

Answer 1

The decrease in demand for hotel rooms concurrent with the increase in airline ticket prices indicates that the two are complementary goods. The relationship between these goods is an example of the cross-price elasticity of demand, where an increase in the price of one good reduces demand for its complement.

Step-by-step explanation:

When the price of an airline ticket from PIT to ACY increases by 20%, and concurrently, the quantity of rooms demanded at the Lakes decreases from 100 rooms per night to 80 rooms per night, this indicates a cross-price elasticity of demand scenario. Using the concept of cross-price elasticity of demand, which measures the responsiveness of the demand for one good to a change in the price of another good, we can infer the relationship between two goods. If two goods are complements, an increase in price of one will lead to a decrease in quantity demanded of the other. Conversely, if they are substitutes, an increase in the price of one good will lead to an increase in the quantity demanded of the other.

In this case, because the demand for hotel rooms goes down as the price for airline tickets goes up, it shows that the rooms at the Lakes and airline trips between PIT and ACY are complementary goods. This is because the price increase for flights makes fewer people travel, which reduces the demand for related hotel rooms. Thus, the correct answer is option a: Complementary goods.