Demand equation

Hotel One is one of the two hotels serving Dayville, a small town in the US Midwest. Fifty percent of its customers are out-of-town visitors to the local college, 30 percent are visiting Dayville for business purposes, and the remaining 20 percent of Hotel One’s customers are leisure travelers. The hotel is within one mile from campus, approximately four miles from the city center, and eight miles from the airport. Reaching by car, taxi, or city bus is easy. You are a manager of Hotel One. Your facility consists of 150 rooms, all of which are standard rooms with two double beds. Your only competitor in Dayville, The Other Hotel, has fewer rooms (100), but 20 of their rooms are luxury suites with king beds and a sofa couch (the other 80 are standard rooms with two double beds). This is the extent of the information provided to you at this point.
In order to better understand your unit’s operating environ​ment, you are asked to provide your estimate of the demand equation that would account for various factors that affect your customer traffic. This will be done by using regression techniques. The first step in estimating a demand equation is to determine what variables will be used in the regression. Please provide detailed answers to the following questions:

  1. What do you think should be the dependent variable in your demand equation? What units of measurement for that variable are you going to adopt? Please provide a detailed explanation for these choices.
  2. Please request information about up to five independent (explanatory) variables for your demand equation. For each variable, you request, (i) provide reasons why you expect it to be important for your analysis and (ii) explain the expected sign of the relationship between the proposed independent variable and your proposed dependent variable.
  3. Show the exact demand equation you are proposing to estimate.
  4. List at least three other variables that you considered as independent (explanatory) variables in
    the regression, but chose not to include. Why did you choose not to include them?

Sample Solution