Hotel rooms in Smalltown go for $100, and 1,000 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 a…
a) So there are 900 rooms rented after the tax, and the local government gets $10 per rented room, so Revenue = # of rooms rent * tax per room
Revenue = 900 * 10 = $9000
Deadweight loss = .5*change in price*change in quantity demanded
Our price changed by…
(100-108) = -8
Change in quantity demanded (900-1000) = 100
So deadweight loss = .5*-8*100 = -400 I think that they typically just want the positive number since the negative is implied by the word loss.