a. Whitsend is a seaside resort city in Cornwall. The short run supply of hotel rooms...

 

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a. Whitsend is a seaside resort city in Cornwall. The short run supply of hotel rooms in Whitsend is highly ine- lastic. Although Whitsend is a small city, it has several hotels located within its boundaries. Moreover, just beyond the city limits there are many other hotels, most within a ten minute drive of the center of town. As such, visitors to this area consider hotels inside the city and outside the city to be very close substitutes. Suppose Whitsend imposes a £10 per night tax on any hotel room rented within the city. This tax is levied against consumers. Which of the following is true? Explain. 1. This tax will raise little revenue, since people can avoid it by driving a short distance out of the city. 2. Hotels outside Whitsend will likely raise their rates. 3. Because a high portion of the costs of running a hotel are fixed, the loss of many customers to rival hotels outside the city will force hotels within Whitsend to raise their rates to avoid losses. b. Use graphs showing supply and demand before and after the tax is imposed and an accompanying explana- tion to show how the tax affects prices and quantities. a. Whitsend is a seaside resort city in Cornwall. The short run supply of hotel rooms in Whitsend is highly ine- lastic. Although Whitsend is a small city, it has several hotels located within its boundaries. Moreover, just beyond the city limits there are many other hotels, most within a ten minute drive of the center of town. As such, visitors to this area consider hotels inside the city and outside the city to be very close substitutes. Suppose Whitsend imposes a £10 per night tax on any hotel room rented within the city. This tax is levied against consumers. Which of the following is true? Explain. 1. This tax will raise little revenue, since people can avoid it by driving a short distance out of the city. 2. Hotels outside Whitsend will likely raise their rates. 3. Because a high portion of the costs of running a hotel are fixed, the loss of many customers to rival hotels outside the city will force hotels within Whitsend to raise their rates to avoid losses. b. Use graphs showing supply and demand before and after the tax is imposed and an accompanying explana- tion to show how the tax affects prices and quantities.

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