Suppose Atlanta is proposing to finance their new NFL stadium using taxes on hotel rooms. The idea is that this will get visitors (who are likely benefiting from the stadium) to pay for the stadium rather than the locals. Assume that demand for hotel rooms is given by:
P (Q) = 150 − 5Q
where Q is in thousands of rooms. The supply curve (marginal cost curve) is:MC(Q) = 5Q
There are many hotels in the are so this market is competitive (i.e., the equilibrium is where demand and supply curves intersect).
- What is the equilibrium price and quantity in this market? What is producer surplus?
- Suppose the city sets a tax of t = 10, so that the new marginal cost curve is MC(Q) = 10+5Q. What is the equilibrium price and quantity in this market?
- What is the price that the hotels are receiving?
- How much of the tax are the hotels paying? What is producer surplus?
- Now suppose that the stadium would boost demand for the hotels such that the demand curve would be: P (Q) = 180 − 5Q. Will the hotels back this proposal? (hint: they will back a proposal if the producer surplus increases)