PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 1, Problem 2RQ
To determine
Explain the given statement is true or false.
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In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $80 per room per night to service. You spent $25.00 million on the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $20 million.
If the estimated demand is 10,000 room-nights, the break-even price is:__?____per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)
You must allocate the 70,000 seats in Reliant Stadium (in Houston) among Texan (Houston) and Cowboy
(Dallas) fans for an upcoming game between the two footfall teams. You can set different prices for
seats in the Dallas and Houston sections of the stadium. Suppose you can obtain $40/ticket from
Houston fans irrespective of the number of seats you allocate to Houston fans. You must drop price in
order to sell more tickets to Dallas fans, however. Let Q be the number of tickets you allocate to Dallas
fans. Assume that the maximum price you can charge for these tickets is given by the following inverse
demand function
P= 80
500
(a) Express the total revenue (on all 70,000 seats) from ticket sales as a function of Q;
(b) Derive the first-order condition of the revenue-maximizing problem (it's a function about Q);
(c) What is the optimal number of seats allocated to Dallas fans?
Realizing that there is a great potential for increased tax revenue, government officials in Homeyville began discussing how they could align Airbnb
rentals with hotel stays from a tax perspective. Fast-forward to 2018, at which time Homeyville has finally made tax arrangements with Airbnb to levy
a $40-per-room tax on rentals. However, now the market conditions have changed. More hosts have now entered the Airbnb market, and awareness
of this hotel alternative has increased demand. The following graph shows the demand and supply curves for Airbnb rentals in 2018.
Use the green rectangle (triangle symbols) to illustrate the area representing the revenue raised by a $40-per-room tax. Then use the black point
(cross symbol) to shade the area representing the deadweight loss generated by this tax.
PRICE (Dollars per rental)
200
190
180 Demand 2018
Tax Wedge
170 +
160
150
140
130
120
110
100
0
+
40
80
120 160 200 240
280
RENTALS (Rooms per day)
Supply 2018
320 360 400
Tax Revenue…
Chapter 1 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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