Microeconomics Group Report | Microeconomics | Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

MICROECONOMICS Individual Assignment 4 Full name: Nguyen Ha Chi Student ID: 11220995 Class: EBBA 14.1
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1. How can you use the theory of "Supply, Demand- and elasticity " to explain the case (by using graphs)?
- In this case, the assumption was that the demand for these luxury goods was
quite inelastic. We can see it in the graph below:
The supply curve shifted up with a much smaller rise in
equilibrium price. As the demand is assumed to be inelastic, the
demand curve is steep, which leads to the large rise in equilibrium
price and the relatively small fall in equilibrium quantity.
The rich people who do not response dramatically when there is a
change in price would pay most of the tax. The consumer burden is
greater than the producer burden (P1 – PE > PE – P2)
The gap between a and b in the demand curve is the 10% tax
- However, the demand for these luxury goods is reasonable elastic, then the
flatness of the demand curve and the upward shift of the supply curve leads
to a much rise in equilibrium price and a lager falling in equilibrium quantity
The rich people who do not response dramatically when there is a
change in price would pay most of the tax. The producer burden is
greater than the consumer burden (PE – P2 > P1 – PE)
The gap between a and b in the demand curve is the 10% tax. PE
According to the theory of supply, demand and elasticity, the buyers
response very dramatically when there is a change in price of these luxury goods as
they move to buy the substitute products to avoid paying the tax. The burden of
this tax ended up falling on the workers and retailers who manufacture and sell
these luxury goods, which means the purpose of the tax has failed.
2. What is the implication for the Government in the tax policy?
“Luxury tax” is a good way to raise money from rich people. However, the
fact points out that the assumption of the elasticity of demand for these luxury
goods is not correct. To some extent, it also shows that the government’s tax policy is not appropriate.
The Congress adopted a 10% “luxury tax” which is an inappropriate tax.
This leads to the loss of money in the government and the fall of the supply
quantity, making this kind of policy detrimental to the entire economy.
The burden of this tax ended up falling on the workers and retailers who
manufacture and sell these luxury goods, which means the purpose of the tax has
failed. The Congress should put a lower tax at 4-5% or put 10% tax in some states
as a trial and then analyses the outcome to make next move. Besides, the
government should also make additional measures to avoid the negative effect of the taxation such as: - Anti-dumping
- Raising the import duty to prevent consumers from buying the
substitution products with lowers or no taxes
- Setting import quota on certain luxury goods to benefit the local producers and workers