Suppose the price elasticity of demand for yachts equals o.54, while the price e

Question

Suppose the price elasticity of demand for yachts equals o.54, while the price elasticity of supply for yachts equals 3.09. If Congress reinstates a luxury tax on yachts, who will pay more of the tax?

Question 12 options:

Yacht builders will pay more.

Yacht buyers will pay more.

Yacht builders and buyers will pay equally.

It's impossible to tell without additional information

Yacht builders will pay more.

Yacht buyers will pay more.

Yacht builders and buyers will pay equally.

It's impossible to tell without additional information

Explanation / Answer

Suppose the price elasticity of demand for yachts equals o.54, while the price elasticity of supply for yachts equals 3.09. If Congress reinstates a luxury tax on yachts, who will pay more of the tax Yacht builders will pay more.

This is because as the price elasticity of demand is 0.54, then a change in price will lead to decrease in quantity demanded by 0.54 units. So as tax is levied its prices will increase and quantity demanded will fall, but in the case of builder they will produce more and as a result they will pay more.

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