Cutting the Hotel Tax. Suppose your city initially has a $20-per-night tax on hotel rooms, paid in a legal 21.5 sense by the hotel. Under the tax, the equilibrium price of hotel rooms is $80 per night. (Related to Application 3 on page 455.)
a. Draw a supply-demand graph to show the effects of eliminating the tax.
b. How does the elimination of the tax affect the equilibrium price of hotel rooms?
c. How does the elimination of the tax affect the wages of hotel workers?
d. Is the change in the price greater than, less than, or equal to $20? Why?