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If the government places a 20
If the government places a 20.000 TL tax on luxury cars, will the price paid by consumers rise by more than 20.000 TL, less than 20.000 TL, or exactly 20.000 TL. Explain why?
Expert Solution
Luxury goods have a high elasticity of demand. This means that when price changes by a certain percentage, the quantity demanded changes by a greater percentage. Such a good is highly elastic because it is not a necessity commodity without which the consumer cannot do.
In this case of luxury cars, when the price increases by 20.000TL due to imposition of taxes, a greater percentage of quantity is reduced as compared to the increase in prices since the demand for luxury cars is highly elastic. As a result the greater burden of such a tax falls on the suppliers.
The higher the elasticity, the lesser will be the burden of tax that falls on them. Therefore, when the demand is elastic, the lesser burden will fall on the consumers as compared to the producers.
As a result, the price paid by consumers will rise by less than 20.000TL.
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