Luc Duy Khanh

Student ID: 11212842

Class: EBBA 13.1

Answer

1. Question 1

• In this scenario, it was assumed that demand for these high-end items was
highly inelastic. It's seen in the graph below:
 o With a far lower gain in equilibrium price, the supply curve moved
higher. The demand curve is steep because the demand is believed to
be inelastic, resulting in a significant rise in equilibrium price and a
minor decline in equilibrium quantity.
o The wealthy who do not react quickly when prices change would be
responsible for most of the tax. The load on consumers is larger than
the cost on producers (P1-PE > PE-P2).
o The 10% tax is the difference between a and b on the demand curve.

• If the demand for these luxury products is quite elastic, the flatness of the
demand curve combined with an upward shift in the supply curve results in a
significant increase in equilibrium price and a bigger decrease in equilibrium
quantity.

According to supply, demand, and elasticity theory, customers react very

quickly when the price of these luxury items changes, and they would buy
alternative products to avoid paying the tax. The cost of this tax ultimately
fell on the employees and retailers that make and sell these items, indicating
that the tax's goal was not achieved.
2. Question 2

• A "luxury tax" is an effective approach to raise funds from wealthy

individuals. However, the truth is that the demand elasticity assumption for
these high-end goods is inappropriate. It also demonstrates, to some extent,
that the government's tax policy is ineffective.

• To begin with, the Congress enacted a 10% "luxury tax," which is an

ineffective tax. This results in the government losing money and the supply
quantity falling, making this type of policy harmful to the overall economy.

o The burden of this tax ultimately fell on the employees and merchants
that create and sell these high-end items, indicating that the tax's goal
was not achieved.
• The Congress should have implemented a lower tax rate, such as 4% to 5%,
or a 10% tax rate in select states as a test, and then examined the results
before finalizing the policy.
o Additional actions, such as anti-dumping, import duties should be
raised to deter customers from purchasing replacement items that have
lower or no taxes and import quotas on certain luxury products to aid
local manufacturers and employees are being considered should be
taken by the government to mitigate the negative effects of taxes.