Suppose the government places a $500 tax on luxury cars

Economics Jan 19, 2021

Suppose the government places a $500 tax on luxury cars. If the demand curve for luxury cars were perfectly inelastic, the price paid by consumers will rise by

A. exactly $500.

B. less than $500.

C. more than $500.

Expert Solution

The correct option is:

A. exactly $500.

When the demand is perfectly inelastic, the demand is vertical, parallel to Y-axis which measures the price. Any change in the price i.e Y-Axis leads to the exact change in the demand curve. Hence, the tax would be shifted as the price increase completely.

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