The elasticity of supply for luxury cars

Reference no: EM13783523

Suppose the elasticity of demand for luxury cars is -1.5. The elasticity of supply for luxury cars is 2.5. The elasticity of demand for compact cars is -.90, while the elasticity of supply for compact cars is 1.25. a. The government imposes a tax of $500 per car on the producers of the cars. How much has the after-tax price changed in each market compared to the non-tax case. b. Suppose the untaxed market equilibrium price and quantity is $75k and 2 million, respectively, for the luxury car market, and $25k and 10 million, respectively, for the compact car market. What is the deadweight loss in the market for all cars resulting from the tax? c. Use the information from b. to continue. Suppose the government eliminates the tax on compact cars, and raises taxes on the luxury cars to roughly make up for the lost revenue. Since there were 5x as many compacts as luxury, the government raises the tax on luxury cars by a factor of 5 to $2500 per car. Calculate the deadweight loss in the car market now. d. Provide a brief explanation for your result in c in comparison to b.

Reference no: EM13783523

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