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Answered step-by-stepAsked by MateBuffalo49 on coursehero.com
. The following graph shows the supply and demand curves for...
Image transcription text
The following graph shows the supply and demand curves for Airbnb rentals in the hypothetical economy of Luxuria in 2010, two years after Airbnb
launched; the equilibrium quantity of rentals was 400 rooms per day, and the equilibrium price was $150 per room. At that time, Luxuria was enforcing tax regulations on the market for hotels, but it hadn't yet initiated a tax arrangement on room rentals through Airbnb. On the following graph, use the green rectangle (triangle symbols) to indicate the tax revenue the government could have collected in 2010 if it had levied a $40—per—room tax on Airbnb rentals. (Note: You will not be graded on your placement of this area on the graph.)
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On the following graph, use the green rectangle (triangle symbols) to indicate the tax revenue the government could have collected in 2010 if it had
levied a $40-per-room tax on Airbnb rentals. (Note: You will not be graded on your placement of this area on the graph.)
200
Demand 2010
Supply 2010
190
Potential Tax Revenue
180
170
160
150
PRICE (Dollars per rental)
140
130
120
110
100
0
80
160
240 320 400 480 560 640 720 800
RENTALS (Rooms per day)
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Realizing that there is a great potential for increased tax revenue, government officials in Luxuria began discussing how they could align Airbnb rentals
with hotel stays from a tax perspective. Fast-forward to 2018, at which time Luxuria 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.
200
190
Tax Revenue
180
Supply 2018
170
Demand 2018
Deadweight Loss
160
Tax Wedge
150
PRICE (Dollars per rental)
140
130
120
110
100
0
80
160
240 320 400 480 560 640 720 800
RENTALS (Rooms per day)
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The demand for Airbnb rooms has not only shifted to the right, but it has also become relatively v elastic since 2000. Comparing the market for Airbnb rentals for the two years is complicated by the fact that the graph depicts three changes: total demand increases, total supply increases, and the slope of the demand curve changes. To isolate the effect of elasticity on deadweight loss and government revenue, consider the following scenario: Suppose the government wants to estimate the tax revenues from room rentals for 2030, and economic models predict two different scenarios (A and B), each with a different demand curve (labeled Demand); and DemandB , respectively, on the following graph). Use the objects to the right of the graph to help you determine the potential deadweight loss and revenues generated by the same $40 tax in 2030
under each scenario and enter these values into the following table. (Note: You will not be graded on your placement of any of the objects on the graph.)
Image transcription text
Use the objects to the right of the graph to help you determine the potential deadweight loss and revenues generated by the same $40 tax in 2030
under each scenario and enter these values into the following table. (Note: You will not be graded on your placement of any of the objects on the
graph.)
200
190
Demand
Tax Revenue
180
170
DemandB
160
Deadweight Loss
150
PRICE (Dollars per rental)
140
130
120
110
Supply 2030
100
0
80
0 320 400
480 560 640 720 800
RENTALS (Rooms per day)
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Deadweight Loss Tax Revenue Scenario (Dollars per day) ( Dollars per day) A B
Under scenario A, demand is relatively V elastic, and the tax results in a V deadweight loss and V government revenue than
under scenario B. This suggests that, all other things being equal, the government should tax industries with a relatively V elasticity of demand if it wants to minimize deadweight loss.
Answer & Explanation
Solved by verified expertAnswered by SargentNeutron15740 on coursehero.com
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