Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge beer producers a tax. Before the tax, 10 billion cases of beer were sold every year at a price of $4 per case. After the tax, 5 billion cases of beer are sold every year; consumers pay $6 per case, and producers receive $3 per case (after paying the tax). The amount of the tax on a case of beer is $ per case. Of this amount, the burden that falls on consumers is $ per case, and the burden that falls on producers is $ per case. True or False: The effect of the tax on the quantity sold would have been larger if the tax had been levied on consumers. True False

Answer 1

Answer:

Explanation:

Before Tax

10 billion cases of beer sold per album at a price of $4 per case

After Tax

5 billion cases of beer sold every year, consumers pay $6 per case whereas producer receives $3 per case.

1). Amount of tax per case of beer = (6-4) + (4-3)

=2+1

=$3per case of beer.

2). Burden that falls on consumer

6-4 = $2.

Burden that falls on producer

4-3 = $1

3). The burden of tax would depend on the elasticity of demand and supply curve. If the consumer is elastic demand the burden will fall on producer and if the producer has elastic supply the burden if fall on consumer. Thus the effect of tax doesn't depend on which tax had been levied. Therefore the statement is false