If supply and demand are neither perfectly elastic nor inelastic (i.e. supply slopes upward and demand slopes downward), what will be the effect of a tax of $10 on the market for luxury purses that sell for $500? A. The market price of purses will increase but by less than $510 because consumers and producers will share the tax burden B. The market price of purses will not increase (it will remain at $500) since the tax was placed on producers only. C. The market price of purses will increase to more than $510 because producers will take the opportunity to recover all the tax revenue as well as a little extra D. The market price of purses will increase to $510 because of the tax ($500+ $10 tax $510)

A luxury tax is a tax that is charged as a percentage of the price, i.e. an ad valorem tax, on goods and services that considered not to be essential.

A luxury tax is a type of indirect tax and its effect is to increase the price of the commodity making the final consumer who buys the good to be the only one to bear the burden of the tax.

Therefore, a tax of $10 on luxury purses is equivalent to a 2% ad valorem tax and this will make the market price of purses to increase to $510 because of the tax ($500+ $10 tax $510).

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