1. Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.

a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room.
After the tax is imposed, the going rate for hotel rooms rises to $108, and the number
of rooms rented falls to 900. Calculate the amount of revenue this tax raises for
Smalltown and the deadweight loss of the tax. (Hint: The area of a triangle is 1⁄2 3
base 3 height.)
b. The mayor now doubles the tax to $20. The price rises to $116, and the number of
rooms rented falls to 800. Calculate tax revenue and deadweight loss with this larger
tax. Do they double, more than double, or less than double? Explain.

2. Suppose that instead of a supply-demand diagram, you are given the following
information:
Qs = 100 + 3P
Qd = 400 - 2P
From this information compute equilibrium price and quantity. Now suppose that a
tax is placed on buyers so that Qd = 400 - (2P + T).
If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price
received by sellers and P + T is the price paid by buyers.) Compare these answers for
equilibrium price and quantity with your first answers. What does this show you?

3. Using the graph, assume that the government imposes a $1 tariff on hammers.
Answer the following questions given this information

a. What is the domestic price and quantity demanded of hammers after the
tariff is imposed?
b. What is the quantity of hammers imported before and after the tariff?
c. What would be the amount of consumer surplus before and after the tariff?
d. What would be the amount of producer surplus before and after the tariff?
e. What would be the amount of government revenue because of the tariff?
f. What would be the total amount of deadweight loss due to the tariff?