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Hotel rooms in Small town 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 amount of revenue this tax raises for Small town and the deadweight loss of the tax. (The area of a triangle is ½ × base × 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.
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