EBB6023 ECONOMICS THEORY

INDIVIDUAL ASSIGNMENT

You are required to respond to ALL questions in full. Begin each on a new page.
Submission is by 15th of December 2022 via Eleap.

QUESTION1

There are few industries where the concept of elasticity is not relevant but it is just one factor in
business decision making. The hotel industry is not a perfectly competitive market but hotels do
face considerable competition from rivals. Hotel owners have some influence over the price they
charge for the service they provide and a consideration of the concept of elasticity is important in
decision making.

The National Investor’s (TNI) purchase of the 15-year-old Mafraq Hotel in Abu Dhabi in April 2007
was the company’s first direct hospitality acquisition. But, with the firm’s founding principle being to
incubate UAE-based businesses aligned to the Abu Dhabi 2030 vision was a ‘natural choice’. Fast
forward four and half years and the company has since invested US $50 million in extending and
upgrading the hotel.

The hotel had expectations in terms of the room rates which increased rapidly; certainly for the first
couple of years, the room rates were increasing but the occupancy wasn’t decreasing so for us there
was a low price elasticity of demand. The Yas Island hotels are competing because they are dropping
their rates tremendously. There are furnished hotel apartments coming up posing more business
challenge.

a. What factors might influence the price elasticity of supply and demand for hotel
accommodation such as that at Mafraq?
b. How might a knowledge of the price elasticity of demand for Mafraq being ‘low’ be useful to
its owners in making pricing decisions?
c. Assuming Yas Island Hotels as their direct competitor, briefly explain the concept of cross-
price elasticity of demand.
d. Relating to cost of production, suggests specifically how Mafraq Hotel can maximize their
annual profits.
QUESTION 2