Question

Suppose that the U.S. government decides to charge cola producers a tax. Before the tax, 35 million cases of cola were sold every month at a price of $5 per case. After the tax, 30 million cases of cola are sold every month; consumers pay $7 per case, and producers receive $4 per case (after paying the tax). The amount of the tax on a case of cola 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:

$3, $2, True

Explanation:

The change in the selling price of cola from $5 before the introduction of a tax by the government to $7 after the tax was introduced is simply a decision of the producer. This only has an effect on the volume of cases sold as the law of demand states that the higher the price, the lower the demand and vice versa. As such, if the consumer pays $7 per case after the introduction of tax and only $4 per case goes to the producer, the tax on a case is $3 ($7-$4).

The burden that falls on the consumer is $2 per case. Prior to the introduction of tax, the selling price per case (which goes to the producer) was $5. This is also the cost a consumer parts with for a case of cola. After the introduction of the tax, the consumer parts with $7 ($2 more than the cost before tax was introduced) while the producer gets $4 as against $5 (before tax was introduced). Hence the tax burden on the producer per case is $1 ($5-$4) and $2 per case on the consumer ($7-$5).

If all of the tax had been levied on the consumer, the producer would have received $5 per case (as received before tax was introduced) while the consumer would part with $8 per case ($3 as tax). This would have resulted in the consumer parting away with one more extra dollar. As such, with the law of demand that states that the higher the price, the lower the quantity demand, the effect of the tax on quantity sold would have been larger if it had been levied on the consumer only.