Question

The policy. Work on your own (grade) 

 Hotel rooms in Las Vegas go for an average nightly rate of $ 100, and 100,000 rooms are rented on a typical day.

 (a) To raise revenue, the mayor is considering a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the member of rooms rented falls to 90,000. Calculate the amount of revenue this Lax raised for Vegas and the deadweight loss of the tax.

 (b.) The mayor's alternative policy is to double the tax to $20 per room. The price rises to 116 and the number of rooms falls to 80,000. Calculate tax revenue and deadweight loss with this larger lax. Do they double, more than double, or less than double?

Answer 1

a)

Tax Revenue collected=Unit tax*Quantity sold=10*90000=$900,000

Before the unit tax, equilibrium price is $100 and quantity sold is 100000 units.

After the unit tax, equilibrium price is $108 and quantity supplied is 90000 units.

Dead weight Loss=1/2*(Old equilibrium quantity-New equilibrium quantity)*Per unit tax

Dead weight Loss=1/2*(100000-90000)*10=$50000

b)

Tax Revenue collected=Unit tax*Quantity sold=20*80000=$1,600,000

Before the unit tax, equilibrium price is $100 and quantity sold is 100000 units.

After the unit tax, equilibrium price is $116 and quantity supplied is 80000 units.

Dead weight Loss=1/2*(Old equilibrium quantity-New equilibrium quantity)*Per unit tax

Dead weight Loss=1/2*(100000-80000)*20=$200,000

We can observe that "Tax Revenue Collection" is less than doubled and "Dead Weight Loss" is more than doubled.