A new tax is imposed on a luxury car. The demand for luxury cars is known to be inelastic because they are considered status symbols. How is the tax burden likely to be distributed between consumers and producers in this market?

When a new tax is placed on luxury cars, it is important to understand how this affects both consumers and producers. Since the demand for luxury cars is inelastic, consumers are less sensitive to price changes; they will still buy these cars even if the price goes up. This means that when the tax is added, producers can pass a larger part of the tax onto consumers in the form of higher prices. For example, if a luxury car costs $100,000 and a $10,000 tax is imposed, consumers may end up paying $105,000 instead of the producers absorbing most of the tax. As a result, both consumers and producers share the tax burden, but consumers bear more of it due to their strong desire for these cars.