The demand for hotel accommodation per night is: D1 = 3,500 – 250P1 + 50P2 + 2Y (1)

Demand for hotel accommodation per night

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Imagine a city where hotel and motel accommodation are both completely provided by private
companies, and, from a consumer perspective, these services are viewed as substitutes. The
demand for hotel accommodation per night is:
D1 = 3,500 – 250P1 + 50P2 + 2Y (1)
where D1 is nightly demand for hotel rooms, P1 is price of standard hotel rooms per night, P2 is
price of standard motel rooms per night and Y is average annual consumer income. Assume the
supply of standard hotel rooms by the industry can be described by:
S1 = 350P1 (2)
where S1 is the number of standard hotel rooms per night, and the market clears so:
D1 = S1 (3)
Assume the average annual income, Y, is $75,000 and the price of price of standard motel room
per night is P2 = $170. Further, assume the market always clears, there are no empty rooms and
producers are competitive. Ignore externalities such as cleaning pollution. Answer the following questions:
Section A (20 Marks)
1. What is the equilibrium price of standard hotel rooms per night? (5 Marks)
2. How many standard hotel rooms are provided and rented per night? (5 Marks)
3. Present the relevant diagram. (5 Marks)
4. Calculate the producer surplus for hotel rooms (airline companies). (5 Marks)
Section B (25 Marks)
Assume the government puts a $150 tax on each hotel room rented per night, which is levied on
hotels. Answer the following questions:
1. What is new price of standard hotel rooms to consumers? (5 Marks)
2. What is the new price of standard hotel rooms to hotels? (5 Marks)
3. How many standard hotel rooms are supplied and rented per night? (5 Marks)
4. Present the relevant diagram. (5 Marks)
5. How much tax revenue is raised? (5 Marks)
Section C (25 Marks)
Finally, the government decided not to apply the tax, but a large hotel company who can
dominate the market starts to offer standard hotel rooms. Its supply curve (called marginal cost
curve) for standard hotel rooms per night is:
S2 = 1,000 + 100P1 (4)
1. What will be the new price of standard hotel rooms per night with the new supplier in the
market? (5 Marks)
2. How many standard hotel rooms will be provided per night in this new scenario by the hotels
operating before the large company entered the market? (5 Marks)
3. How many standard hotel rooms the new large company will provide per night?
(5 Marks)
4. How many standard hotel rooms will now be offered in total? (5 Marks)
5. Present the relevant diagram. (5 Marks)
Section D (20 Marks)
Explain how the new type of market structure could affect the market performance. How would
this affect the welfare of consumers?

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