Question

If a consumer pays $120 for a room at a hotel the quantity demanded for hotel rooms will be 4,000. If the consumer pays $140 for a room and the hotel receives $100 for the customer stay at the hotel, we notice that the quantity supplied of hotel rooms decreases to 2,000. Answer the following questions given this information.

a. How much is the excise tax for the hotel room? _______
b. Does the producer pay the entire excise tax? _________
c. How much would the revenue be for the hotel if they charged $120? _______
d. How much would the revenue be for the hotel if they charged $140? _______
e. How much is the revenue from the tax? ________

A) a. $10; b. Yes; c. $480,000; d. $280,000; e. $200,000
B) a. $20; b. No; c. $480,000; d. $280,000; e. $200,000
C) a. $20; b. Yes; c. $480,000; d. $280,000; e. $200,000
D) a. $10; b. No; c. $480,000; d. $280,000; e. $200,000

Answer 1

If the hotel room is priced at $120, both the quantity demanded and supplied are expected to be 4,000, indicating an equilibrium with no shortage or surplus. When tax is imposed, causing the consumer to pay $140 and the hotel to receive $100, it indicates a $40 tax, borne by both parties, as quantity supplied drops to 2,000 rooms.

Step-by-step explanation:

If the price for a hotel room is $120, the quantity demanded will be 4,000 rooms. Since no information about the quantity supplied at this price was given, we assume it to be the same as the demanded quantity, implying a market equilibrium (where quantity supplied matches the quantity demanded).

If the consumer has to pay $140 while the hotel receives only $100, the difference ($40) suggests the presence of an excise tax. This leads to a decrease in the quantity supplied down to 2,000 rooms. It is evident that not only the consumer but also the producer is bearing part of the tax burden, which can be seen from the reduced price the hotel receives for each room after the tax is imposed.

The tax revenue is calculated by multiplying the per-unit tax by the total quantity sold after the tax, which in this scenario is 2,000 rooms. To find the per-unit tax, we take the difference between the price paid by the consumer ($140) and the price received by the producer ($100), which is $40.