Hotel rooms in Smalltown go for $100, and 1000 rooms are rented on a typical day. a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900 . Calculate the amount of revenue this tax raises for Smallown and the deadweight loss of the tax. (Hint: The arca of a triangle is 1/2× base x height) b. The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms rented falls to 800 . Calculate tax revenue and deadweight loss with this larger tax. Do they double, more than double, or less than double? Explain.

Q&A Education