Principles of Microeconomics, 7th Edition

Published by South-Western College
ISBN 10: 128516590X
ISBN 13: 978-1-28516-590-5

Chapter 6 - Part II - Supply, Demand, and Government Policies - Problems and Applications - Page 130: 6

Answer

Price paid by consumer for the luxury car will rise less than $500.

Work Step by Step

The demand for a luxury good is price elastic (PED>1). This means that demand for a luxury good changes more than proportionally with a change in price. With the understanding that consumer will bear a lower tax incidence for a good that is more price elastic, the luxury car producer will bear a heavier burden of the tax in the form of lower profits. This is because if the price of the luxury car were to increase, it will lead to a more than proportionate fall in quantity demanded for the luxury car, resulting in a even larger fall of profits. Therefore, consumer will bear a smaller portion of the $500 tax.
Update this answer!

You can help us out by revising, improving and updating this answer.

Update this answer

After you claim an answer you’ll have 24 hours to send in a draft. An editor will review the submission and either publish your submission or provide feedback.