Economics · Microeconomics
The government is implementing a new policy to impose a specific tax (a fixed amount per unit) on the production of luxury cars. The goal is to discourage consumption by increasing the final retail price. The market for luxury cars is characterized by inelastic dem and (consumers are relatively unresponsive to price changes) and elastic supply (producers can easily adjust o utput). Which of the following describes the conceptual distribution of the tax burden between consumers and producers in this market, based on the concepts of microeconomics, and what is the economic consequence of a per-unit tax on the equilibrium?
- 1Distribution: The tax burden will be borne equally by consumers and producers because of the specific tax. Consequence: Equilibrium quantity remains unchanged.
- 2Distribution: The tax burden will be borne mostly by the producers because supply is elastic. Consequence: Equilibrium price falls, and quantity increases.
- 3Distribution: The tax burden will be borne mostly by the consumers because demand is relatively more inelastic than supply. Consequence: Equilibrium price rises, and quantity falls.✓
- 4Distribution: The tax burden will be borne entirely by the producers because demand is inelastic. Consequence: Equilibrium quantity increases.
Correct answer
Distribution: The tax burden will be borne mostly by the consumers because demand is relatively more inelastic than supply. Consequence: Equilibrium price rises, and quantity falls.
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