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Monday, May 26, 2008

Cross-price elasticity: Hotels vs. Gasoline

Driving up from Greenville - pics to come soon - I saw a motor inn (didn't catch the name at 75 mph) that advertised showing a gasoline receipt and receiving a 20% reduction in normal room rates.

The price of reformulated gasoline increased from 378.1 cents per gallon on 5/12/2008 to 385.1 cents per gallon on 5/17/2008, an increase of 1.8%. If the hoteliers feel they have to drop price by 20% in response to this increase in gasoline prices (assuming everything is in equilibrium), this would suggest a very high cross-price elasticity between gasoline and hotels.

The bigger picture is that markets respond to price changes in other markets, just like we teach in principles of economics (yeah!!)

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