Consider two markets, one for luxury cars and one for compact, economy cars.?

Question

The government introduced a $500 tax on cars. Explain with diagrams the following; in which market (a) will the after tax price rise more; (b) is there a greater loss of consumer surplus?

Answer 1

this is a silly question to be honest...

a) a $500 increase is $500 increase. its the same for both markets. question (a) doesnt make much sense.

b) obviously it would be the economy car market. When cheaper cars get more expensive due to the tax; what consumers are willing to pay and what they have to pay will suffer. This wouldnt affect the luxery car market as much

Answer 2

The producer of the car will absorb part of the tax and not pass all of it on to the consumer. The answer depends on your assumptions.The cost of production would go up $500, not its retail price.

a) There is a smaller markup on small cars so dealers would be less willing to absorb the tax, so small cars price would go up more.
OR
The percentage increase on a luxury car is less than on a small car so customers would be more willing to pay the full tax, so luxury cars would go up more.
TAKE YOUR PICK.