Question

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 20 million bottles of wine were sold every month at a price of $5 per bottle. After the tax, 14 million bottles of wine are sold every month; consumers pay $8 per bottle (including the tax), and producers receive $2 per bottle. The amount of the tax on a bottle of wine is $ per bottle. Of this amount, the burden that falls on consumers is $ per bottle, and the burden that falls on producers is $ per bottle. True or False: The effect of the tax on the quantity sold would have been the same as if the tax had been levied on producers. True False

Answer 1

Answer: The answer is as follows:

Explanation:

Before the tax,

20 million bottles of wine were sold every month at a price of $5 per bottle

After the tax,

14 million bottles of wine are sold every month; consumers pay $8 per bottle (including the tax), and producers receive $2 per bottle.

The amount paid by consumers after tax is $8 per bottle and amount paid by producers is $2 per bottle.

∴ The amount of tax on wine = $8 - $2 = $6 per bottle

Tax burden on consumers = Price paid after tax - price paid before tax

= 8 - 5

=$3 per bottle

Tax burden on Producers = Price received before tax - price received after tax

= 5 - 2

=$3 per bottle

∴ The burden of tax falls equally on both consumers and producers of $3 per bottle each.

The statement is true. Whether the tax is levied on consumer or producer, the effect of the tax on the quantity sold is the same.