4.The price elasticity of demand for automobiles is 2 and the price elasticity of supply is 3. Expenditure on automobiles after imposing a sales tax of 2 percent is $5 billion. Calculate the excess burden of the tax assuming that automobiles are sold in perfectly competitive markets. Assume that the price elasticities given are based on the substitution effect of the tax and that the difference between pretax and posttax prices of cars is very small?

Answer rating: 100% (QA)

Excess burden of tax to be borne by buyers 5 3 2 5 ... View the full answer