(Answered) The price elasticity of demand for automobilies is -2 and

Management Studies

The price elasticity of demand for automobilies 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 post-tax pices of cars is very small. (Please show your workings)

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