Question

2. (20 points) Imagine that the market for hotel rooms in Estes Park Colorado is perfectly competitive. In a typical day hotel rooms go for $100, and 1000 rooms are rented. a. To raise revenue, the mayor of Estes Park decides to charge hotels a lump sum tax per rented room (a lump sum tax is a set dollar amount per room rented). After the tax is imposed, the going rate for hotel rooms rises to $108, the after-tax money received by hotels for a room falls to $98, and the number of rooms rented falls to 900. How much is the lump sum tax? Calculate the amount of revenue this tax raises for Estes Park and the deadweight loss of the tax. (Hint, drawing a graph should helpl) Tax Revenue DWL DELL

Answer 1

A-2) (as lump sun cump kun = Tax Amount paid by - the consumer = $108 - 198 = 110. Amount hotel recined by owners Tax Revenue - Deadweight revenue = meight Tax X loss - Ouantit after Tax = $ 10x 900= $9000. ex loox to 4500. trice 6 Tax Dadu Incidence (los -100) x on buyers- 900 x 100 ใงงง = 80./.. Lince tax incidence incidence on buyers on buyers is more is than 90s loo, Quantity sellers, thus demand is less elastic than supply. This because the side of the market with less elasticity bears a greater Tax burden. is Tax = $20 New price = $116, da soo. Tax Revenue - $20x80o= $ 16000 Deadweight lossa 1x20x zooloo= $2000. cd Bath Tax Renenue and readweight loss increases in a greater proportion than Tax rate increase. As tax rate increases tax revenue increases and the inefficiency created by a tax aso increases. is better will as it combination not create e some all in one inefficiency and burden can be market the dinided.