Perfect Competition in the Market for Hotel Rooms
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Suppose perfect competition prevails in the market for hotel rooms. The current market equilibrium price of a standard hotel room is $100 per night. Show that the current market equilibrium is efficient, assuming that both the marginal cost incurred by sellers and the marginal benefit perceived by buyers reflect all costs and benefits associated with production and use of hotel rooms. Suppose a $10 per night tax is levied on hotel occupancy. Show how this tax will prevent the market from achieving efficient output. Show the loss in net benefits from hotel use resulting from the tax. Create a graph on a spreadsheet program (such as MS Excel), copy and paste it into a MS Word document, write your answer in the MS Word document.
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Solution Summary
The perfect competition in the market for hotel rooms is analyzed. A graph on a spreadsheet program is provided.
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Part 1:
Suppose perfect competition prevails in the market for hotel rooms. The current market equilibrium price of a standard hotel room is $100 per night. Show that the current market equilibrium is efficient, assuming that both the marginal cost incurred by sellers and the marginal benefit perceived by buyers reflect all costs and benefits associated with production and use of hotel rooms.
Look at the graph, the point where demand and supply curve intersect is the market equilibrium. So the equilibrium:
Price = $100 and
Quantity=80
First look at the overall market:
1. If the actual price were more than the equilibrium price, the demand would be less than the supply. Hence, the supplies will not be able to sell all of their production; this will force them to reduce the price in order to sell all of their production. With decrease in price, ...
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