Vu Phan Huyen Chi – EBBA 15.

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Assignment 4
Ex1:
1. Case 1: The demand for luxury goods is inelastic (assumption)
- It was assumed that demand for these luxury goods was quite inelastic.
In this situation, a rise in price resulted in an increase in total revenue.
- The high demand curve indicated that the wealthy were willing to pay
the extra expense in the price of luxury products. The tax increased the
cost of items, resulting in an increase in overall revenue. As a result, the
US fiscal deficit may be lowered.

Price

Tax
Consumer’s tax
incidence

S1 Producer’s tax
incidence
S D

Quantity

2. Case 2: The demand for luxury goods is elastic

- The surprising case was that demand for these premium goods was
quite elastic. In this example, an increase in price results in a loss in
overall revenue.
 - The demand curve was flat, indicating that the wealthy were hesitant to
pay the higher price for luxury products. As a result, the amount
demanded decreased considerably, resulting in a decrease in total
revenue. As a result, the luxury tax produced significantly less money
than anticipated.
- Furthermore, the flat demand curve suggested that producers had to
pay a higher amount of luxury tax than consumers. As a result, rather
than falling on the wealthy as planned, the burden of the new luxury tax
fell on the middle class.

Price

Tax Consumer’s tax

incidence
D

Producer’s tax
S1
S incidence

Quantity

Ex 2:
- When the demand for luxury items is elastic, an increase in the price of
goods results in a decrease in total revenue. As a result, the luxury tax
raised significantly less money than planned and even became a burden
on middle-class producers. To address such a problem, the government
should repeal or reduce taxation.