Assignment 1

Value: 20%
Word Length: Word length not applicable due to the algebraic nature of the assignment. This assessment task is compulsory
Submission Date: Monday 3 August 2015

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=3000 - 200P1 + 50P ₂ +2Y (1)

Where D ₁ is nightly demand for hotel rooms, P ₁ is price of standard hotel rooms per night, P ₂ 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=300P1 (2)

Where S ₁ 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 P ₂ = $150. Further, assume the market always clears, there are no empty rooms and producers are competitive. Ignore externalities such as 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 purchased per night? (5 Marks)
3. Present the relevant diagram. (5 Marks)
4. Calculate the producer surplus for hotels. (5 Marks)

Section B (25 Marks)

Assume the government puts a $100 tax on each hotel room rented per night, which is levied on hotels. Answer the following questions:

1. What is new equilibrium price of standard hotel rooms to consumers? (5 Marks)
2. What is the new equilibrium price of standard hotel rooms to providers? (5 Marks)
3. How many standard hotel rooms are supplied and sold per night? (5 Marks)
4. Present the relevant diagram. (5 Marks)
5. How much tax revenue is raised? (5 Marks)

Section C (20 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=500 + 50P1 (4)

1. What will be the new price of standard hotel rooms with the new supplier in the market? (5 Marks)
2. How many standard hotel rooms will now be provided per night by the hotels operating before the large company entered the market? (5 Marks)
3. How many standard hotel rooms will now be produced in total? (5 Marks)
4. Present the relevant diagram. (5 Marks)

Section D (25 Marks)

Explain how this type of market structure with one very large firm, capable of influencing prices, and a periphery of small price-taking firms could lead to some sort of price-leadership in the market. How would this affect the welfare of consumers?

Price: $16.97

Solution: The downloadable solution consists of 8 pages, 897 words and 3 charts.
Deliverable: Word Document